Nov 17 RTP

PAPER 1: FINANCIAL REPORTING
PART I : RELEVANT AMENDMENTS, NOTIFICATIONS AND ANNOUNCEMENTS
A. Applicable for November, 2017 Examination

1. Amendment in Existing Accounting Standards
The Ministry of Corporate Affairs (MCA) has notified Companies (Accounting
Standards) Amendment Rules, 2016 (G.S.R. 364(E) dated 30.03.2016). It has
omitted AS 6, Depreciation Accounting and amended the following Accounting
Standards issued under Companies (Accounting Standards) Rules, 2006:
(i) AS 2, Valuation of Inventories
(ii) AS 4, Contingencies and Events Occurring After the Balance Sheet Date
(iii) AS 10, Property, Plant and Equipment
(iv) AS 13, Accounting for Investments
(v) AS 14, Accounting for Amalgamations
(vi) AS 21, Consolidated Financial Statements
(vii) AS 29, Provisions, Contingent Liabilities and Contingent Assets
With the view to harmonise Accounting Standards issued by the ICAI for non-
corporate entities and the amendments to the Accounting Standards notified by the
Central Government, the Council of the ICAI decided that the amendments notified
by the Central Government shall also be incorporated in the Accounting Standards
issued by the ICAI for non-corporate entities.
Following table summarises the changes made by the Companies (Accounting
Standards) Amendment Rules, 2016 vis-a-vis the Companies (Accounting Standards)
Rules, 2006 in the following accounting standards:
Name of Para no. As per the As per the Implication
the Companies Companies
standard (Accounting (Accounting
Standards) Standards)
Rules, 2006 Amendment
Rules, 2016
AS 2 4 (an Inventories do Inventories do not Now, inventories
extract) not include include spare also do not
machinery parts, servicing include servicing
spares which equipment and equipment and
can be used standby standby
only in equipment which equipment other
The Institute of Chartered Accountants of India

2 FINAL EXAMINATION: NOVEMBER, 2017

Rules, 2016
connection meet the than spare parts if
with an item of definition of they meet the
fixed asset property, plant definition of
and whose use and equipment as property, plant
is expected to per AS 10, and equipment as
be irregular; Property, Plant per AS 10,
such and Equipment. Property, Plant
machinery Such items are and Equipment.
spares are accounted for in
accounted for accordance with
in accordance Accounting
with Standard (AS) 10,
Accounting Property, Plant
Standard (AS) and Equipment.
10, Accounting
for Fixed
Assets.
27 Common Common Para 27 of AS 2
classifications classifications of requires
of inventories inventories are: disclosure of
are raw (a) Raw materials inventories under
materials and and components different
components, (b) Work-in- classifications.
work in progress One residual
progress, category has
(c) Finished
finished been added to the
goods
goods, stores said paragraph
and spares, (d) Stock-in-trade i.e. Others.
and loose (in respect of
tools. goods acquired
for trading)
(e) Stores and
spares
(f) Loose tools
(g) Others
(specify nature).

PAPER 1 : FINANCIAL REPORTING 3

Rules, 2016
AS 4 Footnote Pursuant to AS All paragraphs of Footnote has
to AS 4 29, Provisions, this Standard that been modified.
Contingent deal with
Liabilities and contingencies are
Contingent applicable only to
Assets, the extent not
becoming covered by other
mandatory in Accounting
respect of Standards
accounting prescribed by the
periods Central
commencing Government. For
on or after 1-4- example, the
2004, all impairment of
paragraphs of financial assets
this Standard such as
that deal with impairment of
contingencies receivables
(viz. (commonly known
paragraphs as provision for
1(a), 2, 3.1, 4 bad and doubtful
(4.1 to 4.4), 5 debts) is
(5.1 to 5.6), 6, governed by this
7 (7.1 to 7.3), Standard.
9.1 (relevant
portion), 9.2,
10, 11, 12 and
16) stand
withdrawn
except to the
extent they
deal with
impairment of
assets not
covered by
other Indian
Accounting


Rules, 2016
Standards. For
example,
impairment of
receivables
(commonly
referred to as
the provision
for bad and
doubtful
debts), would
continue to be
covered by AS
4.
8.5 There are There are events No liability for
events which, which, although proposed
although they they take place dividends has to
take place after the balance be created now.
after the sheet date, are Such proposed
balance sheet sometimes dividends are to
date, are reflected in the be disclosed in
sometimes financial the notes.
reflected in the statements
financial because of
statements statutory
because of requirements or
statutory because of their
requirements special nature.
or because of For example, if
their special dividends are
nature. Such declared after the
items include balance sheet
the amount of date but before
dividend the financial
proposed or statements are
declared by approved for
the enterprise issue, the
after the dividends are not


Rules, 2016
balance sheet recognised as a
date in respect liability at the
of the period balance sheet
covered by the date because no
financial obligation exists
statements. at that time unless
a statute requires
otherwise. Such
dividends are
disclosed in the
notes.
14 Dividends If an enterprise No liability for
stated to be in declares proposed
respect of the dividends to dividends has to
period covered shareholders be created now.
by the financial after the balance Such proposed
statements, sheet date, the dividends are to
which are enterprise should be disclosed in
proposed or not recognise the notes.
declared by those dividends
the enterprise as a liability at the
after the balance sheet
balance sheet date unless a
date but statute requires
before otherwise. Such
approval of the dividends should
financial be disclosed in
statements, notes.
should be
adjusted.
AS 10 All Accounting for Property, Plant Entire standard
Fixed Assets and Equipment has been revised
with the title AS
10: Property,
Plant and
Equipment by


Rules, 2016
replacing the
existing AS 6
Depreciation
Accounting and
AS 10
Accounting for
Fixed Assets.
(Refer Appendix I
at the end of this
part for overview
of AS 10
Property, Plant
and Equipment)
AS 13 20 The cost of An investment Accounting of
any shares in a property is investment
co-operative accounted for in property was not
society or a accordance with stated in this para
company, the cost model as but now
holding of prescribed in incorporated i.e.
which is Accounting at cost model.
directly related Standard (AS) 10,
to the right to Property, Plant
hold the and Equipment.
investment The cost of any
property, is shares in a co-
added to the operative society
carrying or a company, the
amount of the holding of which
investment is directly related
property. to the right to hold
the investment
property, is added
to the carrying
amount of the
investment
property.


Rules, 2016
30 An enterprise An enterprise Accounting of
holding holding investment
investment investment property shall
properties properties should now be in
should account for them accordance with
account for in accordance AS 10 i.e. at cost
them as long with cost model model
term as prescribed in
investments. AS 10, Property,
Plant and
Equipment.
AS 14 3(a) Amalgamation Amalgamation Definition of
means an means an Amalgamation
amalgamation amalgamation has been made
pursuant to the pursuant to the broader by
provisions of provisions of the specifically
the Companies Act, including
Companies 2013 or any other merger.
Act, 1956 or statute which may
any other be applicable to
statute which companies and
may be includes merger.
applicable to
companies.
18 and 39 In such cases In such cases the Corresponding
the statutory statutory reserves debit on account
reserves are are recorded in of statutory
recorded in the the financial reserve in case of
financial statements of the amalgamation in
statements of transferee the nature of
the transferee company by a purchase is
company by a corresponding termed as
corresponding debit to a suitable Amalgamation
debit to a account head Adjustment
suitable (e.g., Reserve and is
account head Amalgamation now to be


Rules, 2016
(e.g., Adjustment presented as a
Amalgamation Reserve) which separate line item
Adjustment is presented as a since there is not
Account) separate line sub-heading like
which is item. When the miscellaneous
disclosed as a identity of the expenditure in
part of statutory reserves Schedule III to the
miscellaneous is no longer Companies Act,
expenditure or required to be 2013
other similar maintained, both
category in the the reserves and
balance sheet. the aforesaid
When the account are
identity of the reversed.
statutory
reserves is no
longer
required to be
maintained,
both the
reserves and
the aforesaid
account are
reversed.
AS 21 9 A parent which A parent which Amendment has
presents presents been made in line
consolidated consolidated with the
financial financial provisions of the
statements statements Companies Act,
should should 2013.
consolidate all consolidate all
subsidiaries, subsidiaries,
domestic as domestic as well
well as foreign, as foreign, other
other than than those
those referred referred to in
paragraph 11.


Rules, 2016
to in Where an
paragraph 11. enterprise does
not have a
subsidiary but has
an associate
and/or a joint
venture such an
enterprise should
also prepare
consolidated
financial
statements in
accordance with
Accounting
Standard (AS) 23,
Accounting for
Associates in
Consolidated
Financial
Statements, and
Accounting
Standard (AS) 27,
Financial
Reporting of
Interests in Joint
Ventures
respectively.
Illustration A statement A statement Reference to the
(vi) showing the showing the Companies Act,
computation of computation of 2013 has been
net profits in net profits in inserted by
accordance accordance with removing the
with section section 198 of the reference of the
349 of the Companies Act, Companies Act,
Companies 2013, with 1956.
Act, 1956, with relevant details of
relevant the calculation of


Rules, 2016
details of the the commissions
calculation of payable by way of
the percentage of
commissions such profits to the
payable by directors
way of (including
percentage of managing
such profits to directors) or
the directors manager (if any).
(including
managing
directors) or
manager (if
any).
AS 29 35 (An The amount of The amount of a Now discounting
extract) a provision provision should of provision for
should not be not be discounted decommissioning,
discounted to to its present restoration and
its present value except in similar liabilities
value. case of has to be done as
decommissioning, per the pre-tax
restoration and discount rate as
similar liabilities mentioned
that are therein.
recognised as
cost of Property,
Plant and
Equipment. The
discount rate (or
rates) should be a
pre-tax rate (or
rates) that
reflect(s) current
market
assessments of
the time value of
money and the


Rules, 2016
risks specific to
the liability. The
discount rate(s)
should not reflect
risks for which
future cash flow
estimates have
been adjusted.
Periodic
unwinding of
discount should
be recognised in
the statement of
profit and loss.
73 Transitional Discounting of
Provisions above existing
All the existing provisions and
provisions for similar liabilities
decommissioning, should be
restoration and prospectively,
similar liabilities with the
(see paragraph corresponding
35) should be effect to the
discounted related item of
prospectively, property, plant
with the and equipment.
corresponding
effect to the
related item of
property, plant
and equipment.
2. Indian Accounting Standards
The topic "Introduction of Indian Accounting Standards (Ind AS); Comparative study
of ASs vis--vis Ind ASs; Carve outs/ins in Ind ASs vis--vis International Financial

Reporting Standards (IFRSs)" had been included in the syllabus and is applicable for
November, 2017 Examination.
However, considering the extensive coverage of the contents covered in this topic,
small simple problems involving conceptual or application issues may be asked in the
examination.
It may be noted that the existing Accounting Standards will continue to be applicable
for November, 2017 examination for all chapters except Chapter 2 as mentioned
above and Chapter 6 on 'Accounting and Reporting of Financial Instruments' which
would be based on Ind AS 32, 107 and 109.
3. Companies (Indian Accounting Standards) (Amendment) Rules, 2016
MCA has issued Companies (Indian Accounting Standards) (Amendment) Rules,
2016 to amend Companies (Indian Accounting Standards) Rules, 2015. The
amended Rules, inter alia, provide the following:
Roadmap for implementation of Ind AS by Non-Banking Financial Companies;
As per the notification,
(a) The following NBFCs shall comply with the Indian Accounting Standards
(Ind AS) for accounting periods beginning on or after the 1st April, 2018,
with comparatives for the periods ending on 31st March, 2018, or
thereafter
(A) NBFCs having net worth of rupees five hundred crore or more;
(B) holding, subsidiary, joint venture or associate companies of
companies covered under item (A),
(b) The following NBFCs shall comply with the Indian Accounting Standards
(Ind AS) for accounting periods beginning on or after the 1st April, 2019,
with comparatives for the periods ending on 31st March, 2019, or
thereafter
(A) NBFCs whose equity or debt securities are listed or in the process of
listing on any stock exchange in India or outside India and having net
worth less than rupees five hundred crore;
(B) NBFCs, that are unlisted companies, having net worth of rupees two-
hundred and fifty crore or more but less than rupees five hundred
crore; and
(C) holding, subsidiary, joint venture or associate companies of
companies covered under item (A) or item (B) of sub-clause (b),
Omission of Ind AS 115, Revenue from Contracts with Customers, and insertion
of Ind AS 11, Construction contracts and Ind AS 18, Revenue; (Refer
Appendix II at the end of this part for overview of Ind AS 11 and Ind AS 18).

Consequential amendments to other Ind AS on the omission of Ind AS 115 and

inclusion of Ind AS 11 and Ind AS 18.
MCA also made certain amendments in some notified Ind AS to reflect the
amendments made by the IASB to the IFRS either on account of narrow-focus
improvements to disclosure requirements that the IASB had identified to
International Accounting Standard (IAS) 1, Presentation of Financial
Statements or due to the annual improvement cycle 20122014 or
amendments to IFRS 10, Consolidated Financial Statements; IFRS 12,
Disclosure of Interests in Other Entities; and IAS 28, Investments in Associates
and Joint Ventures, to address issues that have arisen in relation to the
exemption from consolidation for investment entities or amendment in Ind AS
101, First-time adoption of Indian Accounting Standards, to remove the option
to use fair value for investment property as the deemed cost on the date of
transition.
The key amendments to Ind AS pursuant to the Companies (Indian Accounting
Standards) (Amendments) Rules, 2016 are listed below:
Ind AS Significant amendments
Ind AS 1, On Materiality
Presentation of The amendments clarify that while aggregating
Financial information in the financial statements, an entity must not
Statements reduce the understandability of its financial statements by
obscuring material information with immaterial
information or by aggregating material items that have
different natures or functions.
The amendments further accentuated that even when a
standard requires a specific disclosure, the information
must be assessed as to that its insufficiency may not
prevent users of financial statements to understand the
impact of particular transactions, other events and
conditions on the entitys financial position and financial
performance.
On presentation of Subtotals
An entity shall present additional line items (including by
disaggregating the line items listed in paragraph 54),

The annual improvements process of IASB is a vehicle for making non-urgent but necessary
amendments to the standards. These amendments are limited to the changes that either clarify the
wordings in an IFRS or correct relatively minor unintended consequences, oversights or conflicts between
the existing requirements of the IFRS.


headings and subtotals in the balance sheet when such
presentation is relevant to an understanding of the entitys
financial position.
An entity has to present additional subtotals in the balance
sheet or the statement of profit and loss labelled it in a
manner that makes the line items understandable. Also as
per the amendment, such sub totals shall be consistent from
period to period and not be displayed with more prominence
than the subtotals and totals required in Ind AS.
The amendments require that additional subtotals in the
statement of profit and loss should be reconciled to the
subtotals and totals required by Ind AS 1.
On Systematic Grouping and Presentation of Notes
The management of an entity shall consider the
understandability and comparability of the financial
statements when it determines the group or order of the
notes. An entity might, for example, present more
significant notes first, or present linked areas
sequentially. Such flexibility allows management to alter
their presentation to their circumstances.
The notification also states that the share of other
comprehensive income arising from investments
accounted for under the equity method is grouped based
on whether the items will or will not subsequently be
reclassified to profit or loss. Each group should then be
presented as a single line item in the statement of other
comprehensive income.
On Disclosure of Accounting Policies
Paragraph 120 of Ind AS 1 has been deleted which
included the examples of significant accounting policies
i.e., the income taxes accounting policy and the foreign
currency accounting policy since they were not found
significant.
Ind AS 19, Actuarial Assumptions: Discount Rate
Employee The amendment clarifies that for determining the discount rate
benefits for post-employment benefit obligations, with respect to
currencies other than Indian rupee for which there is deep
market in high quality corporate bonds, the market yields (at
the end of the reporting period) on such high quality corporate
bonds denominated in that currency shall be used.


Ind AS 28, As per the amendment, if an entity that is not itself an
Investments in investment entity has an interest in an associate or joint
associates and venture that is an investment entity, the entity may, when
joint ventures applying the equity method, retain the fair value measurement
applied by that investment entity associate or joint venture to
its interest in subsidiaries.
Ind AS 34, Ind AS 34 requires entities to disclose information in the notes
Interim to the interim financial statements, if not disclosed elsewhere
financial in the interim financial report.
reporting Amendment in Ind AS 34 clarified that such disclosures shall
be given either in the interim financial statements or
incorporated by cross-reference from the interim financial
statements to some other statement (such as management
commentary or risk report) that is available to users of the
financial statements on the same terms as the interim financial
statements and at the same time. If users of the financial
statements do not have access to the information incorporated
by cross-reference on the same terms and at the same time,
the interim financial report is incomplete. The information shall
normally be reported on a financial year-to-date basis.
Ind AS 101, Ind AS 40 only permits the cost model for measurement of
First-time investment properties after initial recognition. Hence, the
adoption of amendment has been made to remove the option to use fair
Indian value for investment property as the deemed cost under Ind
Accounting AS 101 on the date of transition.
Standards
Ind AS 105, The amendment clarifies that when an asset (or disposal
Non-current group) is reclassified from held for sale to held for
Assets held for distribution, or vice versa, then the change in classification is
Sale and considered a continuation of the original plan of disposal.
Discontinued The entity shall apply the classification, presentation and
Operations measurement requirements as are applicable to the new method
of disposal and shall measure such asset at lower of its carrying
amount and fair value less costs to sell/distribute, as the case
may be, and recognise any reduction or increase on it.
The amendment also clarifies that changing the disposal
method does not change the date of classification.
Ind AS 107, If an entity transfers a financial asset to a third party under
Financial conditions which allow the transferor to derecognise the asset,
Ind AS 107 requires disclosure of all types of continuing


Instruments: involvement that the entity might still have in the transferred
Disclosures assets. The amendment in Ind AS 107 illustrates the term
continuing involvement in context of service contracts.
Ind AS 110, Exemptions for application of Ind AS 110
Consolidated Paragraph 31 of Ind AS 110 requires an investment entity
Financial to measure an investment in a subsidiary at fair value
Statements through profit or loss in accordance with Ind AS 109,
Financial instruments. It has been clarified that, as an
exception to this, an investment entity would consolidate
a subsidiary only if it is not an investment entity itself, and
if it acts as an extension of the investment entity by
providing services that support the investment entitys
activities. All subsidiaries that are themselves investment
entities are measured at fair value through profit and loss.
Another exemption for non-application of this Ind AS 110
is on post-employment benefit plans or other long-term
employee benefit plans to which Ind AS 19, Employee
Benefits, applies.
Ind AS 110 was amended to clarify that the exemption
from preparing consolidated financial statements
contained in paragraph 4(a) of Ind AS 110 is available to
a parent entity that is a subsidiary of an investment entity
(provided all other conditions in paragraph 4(a) are met)
even when the investment entity measures all of its
subsidiaries at fair value.
Ind AS 112, The amendment clarifies the application of the standard to
Disclosure of investment entities. An investment entity, that prepares
Interests in separate financial statements in which all of its subsidiaries
Other Entities are measured at fair value through profit or loss in accordance
with Ind AS 109, requires to present the disclosures in respect
of such investment entities as per Ind AS 112. This
amendment to Ind AS 112 is consequential to the
amendments to Ind AS 28 and Ind AS 110.
4. Applicability of Amendments to Ind AS 7 and Ind AS 102 issued by the MCA
dated 17th March 2017
To align Ind AS with IFRS, the recent amendments made in IAS 7 and IFRS 2 by the
IASB have been incorporated in Ind AS 7 'Statement of Cash Flows' and Ind AS 102
'Share-based Payment' by way of a notification issued by the Ministry of Corporate
Affairs on 17th March, 2017.

A. Amendments in Ind AS 7 'Statement of Cash Flows'

(i) Disclosure requirements
The amendments made to Ind AS 7 require certain additional disclosures
that enable users of financial statements to evaluate changes in liabilities
arising from financing activities, including both changes arising from cash
flows and non-cash changes.
In addition to the above, the disclosure is required for changes in financial
assets (for example, assets that hedge liabilities arising from financing
activities) if cash flows from those financial assets were, or future cash
flows will be, included in cash flows from financing activities.
As per the amendment, one of the way for disclosure is providing a
reconciliation between the opening and closing balances in the balance
sheet for liabilities arising from financing activities, including the changes
identified, by linking items included in the reconciliation to the balance
sheet and the statement of cash flows for the sake of information to the
users.
If an entity provides disclosures of changes in other assets and liabilities
besides changes in liabilities arising from financing activities, it shall
disclose the later changes separately from changes in those other assets
and liabilities.
(ii) Transitional provisions and applicability of the amendment
Further, with respect to these amendments, an entity is not required to
provide comparative information for preceding periods since these
amendments will be applicable for the annual periods beginning on or after
1 April, 2017.
B. Amendments in Ind AS 102 'Share-based Payment'
(i) The amendments cover following accounting areas:
" Measurement of cash-settled share-based payments
Under Ind AS 102, the measurement basis for an equity-settled share-
based payment should not be 'fair value' in accordance with Ind AS 113,
'Fair value measurement'. However, 'fair value' was not defined in
connection with a cash-settled share-based payment. The amendment
clarifies that the fair value of a cash-settled award is determined on a basis
consistent with that used for equity-settled awards. Market-based
performance conditions and non-vesting conditions are reflected in the 'fair
value', but non-market performance conditions and service conditions are
reflected in the estimate of the number of awards expected to vest.

The amendment to Ind AS 102 with respect to measurement of cash-settled

awards has most impact where an award vests (or does not vest) based on
a non-marketing condition. Absent this clarification, it may be argued that
the fair value of a cash-settled award is to be determined using the
guidance in Ind AS 113 and reflecting the probability that non-market and
service vesting conditions would be met. The amendment clarifies that
non-market and service vesting conditions are ignored in the measurement
of fair value.
" Classification of share-based payments settled net of tax withholdings
Tax laws or regulations may require the employer to withhold some of the
shares to which an employee is entitled under a share-based payment, and
to remit the tax payable on it to the tax authority.
Ind AS 102 would require such share based payment to be split into a cash
settled component for the tax payment and an equity settled component for
the net shares issued to the employee. The amendment now adds an
exception that requires the share based payment to be treated as equity-
settled in its entirety. The cash payment to the tax authority is treated as
if it was part of an equity settlement. The exception would not apply to any
equity instruments that the entity withholds in excess of the employee's tax
obligation associated with the share-based payment.
" Accounting for a modification of a share-based payment from cash-
settled to equity-settled
As per the amendment, if the terms and conditions of a cash-settled share-
based payment transactions are modified with the result that it becomes
an equity-settled share-based payment transaction, the transaction is
accounted for as such from the date of the modification. Specifically:
o The equity-settled share-based payment transaction is measured by
reference to the fair value of the equity instruments granted at the
modification date. The equity-settled share-based payment
transaction is recognised in equity on the modification date to the
extent to which goods or services have been received.
o The liability for the cash-settled share-based payment transaction as
at the modification date is derecognised on that date.
o Any difference between the carrying amount of the liability
derecognised and the amount of equity recognised on the
modification date is recognised immediately in profit or loss.
o The amendment requires any change in value to be dealt with before
the change in classification. Accordingly, the cash-settled award is
remeasured, with any difference recognised in the statement of profit

and loss before the remeasured liability is reclassified into equity.

(ii) Transitional provisions
The transition provisions specify that the amendments apply to share
based payment that are not settled as at the date of first application or to
modifications that happen after the date of first application, without
restatement of prior periods. There is no income statement impact as a
result of any reclassification from liability to equity in respect of 'net settled
awards'; the recognised liability is reclassified to equity without any
adjustment.
The amendments can be applied retrospectively, provided that this is
possible without hindsight and that the retrospective treatment is applied
to all of the amendments.
(iii) Applicability date of the amendment
The amendment rules shall be applicable from annual periods beginning
on or after 1 April 2017. Accordingly, these amendments are not applicable
to Phase I entities preparing their first Ind AS financial statements for the
year ended 31 March 2017. However, such entities would need to provide
relevant disclosures under Ind AS 8, 'Accounting Policies, Changes in
Accounting Estimates and Errors' in their first Ind AS financial statements.
5. Applicability of Guidance Notes
Following are the additional four Guidance Notes (besides what is given in the study
material) applicable to you for the forthcoming examination
1. Guidance Note on Accounting for Expenditure on Corporate Social
Responsibility Activities. (Refer Appendix III at the end of this part for overview
of this Guidance Note)
2. Guidance Note on Accounting for Derivative Contracts. (Refer Appendix III at
the end of this part for overview of this Guidance Note)
3. Guidance Note on Accounting for Depreciation in Companies in the context of
Schedule II to the Companies Act, 2013 (Refer Appendix III at the end of this
part for overview of this Guidance Note)
4. Guidance Note on Accounting for Real Estate Transactions (Revised 2012)
For full text, students are advised to refer the following links respectively:
1. http://resource.cdn.icai.org/38254asb27888csr.pdf
2. http://resource.cdn.icai.org/38253asb27888dc.pdf
3. http://resource.cdn.icai.org/41241research31047.pdf
4. http://resource.cdn.icai.org/25896asb15443.pdf

6. Amendment in Schedule III to the Companies Act, 2013

Ministry of Corporate Affairs has amended Schedule III to the Companies Act, 2013
by inserting Division II to the Schedule which provides
(a) General Instructions for preparation of financial statements of a company
required to comply with Ind AS
(b) Format for Part I Balance Sheet as per Ind AS
(c) Format for Statement of Changes in Equity
(d) General Instructions for Preparation of Balance Sheet
(e) Part II Statement of Profit and Loss
(f) General Instructions for Preparation of Statement of Profit and Loss
(g) Part III- General Instructions for the Preparation of Consolidated Financial
Statements
Pursuant to the above amendment, Schedule III contains two Division viz-
Division I - Financial Statements for a company whose Financial Statements are
required to comply with the Companies (Accounting Standards) Rules, 2006.
Division II - Financial Statements for a company whose Financial Statements are
drawn up in compliance of the Companies (Indian Accounting Standards) Rules,
2015.
7. RBI- Issuance of Master Directions and Frequently Asked Questions
I. Master Directions on Non-Banking Finance Companies
The Reserve Bank of India has started issuing Master Directions on all
regulatory matters beginning January 2016. The Master Directions consolidate
instructions on rules and regulations framed by the Reserve Bank under various
Acts including banking issues and foreign exchange transactions. The process
of issuing Master Directions involves issuing one Master Direction for each
subject matter covering all instructions on that subject. Any change in the rules,
regulation or policy is communicated during the year by way of circulars/press
releases. The Master Directions will be updated suitably and simultaneously
whenever there is a change in the rules/regulations or there is a change in the
policy. All the changes will get reflected in the Master Directions available on
the RBI website along with the dates on which changes are made. The existing
set of Master Circulars issued on various subjects will stand withdrawn with the
issue of the Master Direction on the subject.
NBFCs are categorized into following three groups for the purpose of
administering prudential regulations:
1. Deposits taking NBFCs (NBFCs-D);

2. Non-deposit taking NBFCs (NBFCs-ND) (those with assets of less than

` 500 crore); and
3. Nondeposit taking systemically important NBFCs (NBFCs-ND-SI) (those
with assets of ` 500 crore and above)
In order to ensure that NBFCs function on sound and healthy lines and make
adequate disclosures in their financial reports, the Reserve Bank has issued
prudential norms for all the Non-Banking Financial Companies. Earlier, there
were following two sets of prudential norms:
A. Systemically Important Non-Banking Financial (Non-Deposit Accepting or
Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015
in supersession of Non-Banking Financial (Deposit Accepting or Holding)
Companies Prudential Norms (Reserve Bank) Directions, 2007; and
B. Non-Systemically Important Non-Banking Financial (Non-Deposit
Accepting or Holding) Companies Prudential Norms (Reserve Bank)
Directions, 2015 in supersession of Non-Banking Financial (Non-Deposit
Directions, 2007
Now on 1st September, 2016, RBI has issued two Master Directions replacing
the above two old Directions ie.
A. Master Direction - Non-Banking Financial Company Non-Systemically
Important Non-Deposit taking Company (Reserve Bank) Directions, 2016,
in supersession of certain notifications and the directions as follows:
(i) Non-Banking Financial (Non- Deposit Accepting or Holding)
Companies Prudential Norms (Reserve Bank) Directions, 2007
(ii) Non-Banking Financial Company -Infrastructure Finance Companies
(iii) Non-Banking Financial Company -Micro Finance Institutions
(Reserve Bank) Directions, 2011
(iv) Non-Banking Financial Company Factor (Reserve Bank) Directions,
2012
(v) Non-Systemically Important Non-Banking Financial (Non-Deposit
Directions, 2015
(Link: https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10585)
B. Master Direction - Non-Banking Financial Company - Systemically
Important Non-Deposit taking Company and Deposit taking Company
(Reserve Bank) Directions, 2016, in supersession of certain notifications
and the directions as follows:

(i) Non-Banking Financial (Deposit Accepting or Holding) Companies

Prudential Norms (Reserve Bank) Directions, 2007
(ii) Non-Banking Financial Company -Infrastructure Finance Companies
(iii) Infrastructure Debt Fund-Non-Banking Financial Companies
(iv) Non-Banking Financial Company -Micro Finance Institutions
(v) Non-Banking Financial Company Factor (Reserve Bank) Directions,
2012
(vi) Systemically Important Non-Banking Financial (Non-Deposit
Directions, 2015
(Link: https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10586)
II. Frequently Asked Questions
Explanations of rules and regulations will be issued by way of Frequently Asked
Questions (FAQs) after issue of the Master Directions in easy to understand
language wherever necessary. Till date, RBI has issued FAQs on following
topics in NBFC:
1. Core Investment Companies (Dec 20, 2016)
2. All you wanted to know about NBFCs (Nov 29, 2016)
3. Non-Banking Financial Company - Micro Finance Institutions (NBFC-MFIs)
(Oct 14, 2016)
4. Infrastructure Finance Companies (IFCs) (Mar 01, 2016)
5. Infrastructure Debt Funds (May 15, 2013)
6. NBFC Factors (Apr 03, 2013)
(Link: https://www.rbi.org.in/Scripts/FAQDisplay.aspx?dId=47939)
8. Dividend Distribution Tax
(a) With effect from 1st Oct, 2014 dividend and income distribution tax is leviable on
gross dividend / income and not on the net dividend / income distributed to
shareholders and unit holders as per Income- tax Act, 1961.
(b) The rate of DDT is fifteen per cent (excluding surcharge of 12% plus secondary
and higher education cess is (2+1) 3%).

9. Relevant Sections of the Companies Act, 2013

The relevant Sections of the Companies Act, 2013 notified up to 30th April, 2017 are
applicable for November, 2017 Examination.
B. Not applicable for November, 2017 examination
1. Overview of International Financial Reporting Standards (IFRS)
The topic Overview of International Accounting Standards (IAS) / International
Financial Reporting Standards (IFRS), Interpretations by International Financial
Reporting Interpretation Committee (IFRIC), Significant differences vis-a-vis Indian
Accounting Standards; Understanding of US GAAPs, Applications of IFRS and US
has been excluded from the syllabus and the same is not applicable for November,
2017 Examination.
2. Guidance Note on Availability of Revaluation Reserve for Issue of Bonus Shares
This Guidance Note has been withdrawn by the ICAI, hence students are not required
to study the same for November, 2017 and onward examinations.
3. Ind AS 115 on 'Revenue from Contracts with Customers'
On account of deferment of applicability of IFRS 15 by International Accounting
Standards Board (IASB) till 1st January, 2018, the MCA has also deferred Ind AS 115
by omitting the same from the Rules. Hence students are not required to study the
same for November, 2017 examination.
Appendix I
AS 10: Property, plant and Equipment
1. Introduction
The objective of this Standard is to prescribe Accounting treatment for Property, Plant and
Equipment (PPE). The principal issues in accounting for property, plant and equipment
are the recognition of the assets, the determination of their carrying amounts and the
depreciation charges and impairment losses to be recognised in relation to them.
Discern
Information
Prescribe Help the about Investment
Objectives of "Accounting Users of in PPE
AS 10 Treatment Financial
for PPE" Statements Changes in such
Investment

The principal issues in Accounting for PPE are:
Determination of Impairment losses

their carrying to be recognised in
amounts relation to them
Depreciation
Recognition of the
charges
Principle Assets
Issues in
Accounting of
PPE
2. Scope of the Standard

As a general principle, AS 10 should be applied in accounting for PPE.
Exception: When another Accounting Standard requires or permits a different accounting
treatment.
Example: AS 19 on Leases, requires an enterprise to evaluate its recognition of an item
of leased PPE on the basis of the transfer of risks and rewards. However, it may be noted
that in such cases other aspects of the accounting treatment for these assets, including
depreciation, are prescribed by this Standard.
This Standard does not apply to:
AS 10
Not Applicable to
Wasting Assets including Mineral rights,

Biological Assets (other than Bearer Expenditure on the exploration for and
Plants) Related to agricultural activity extraction of minerals, oil, natural gas
and similar non-regenerative resources
Note: AS 10 applies to Bearer Plants but it does not apply to the produce on
Bearer Plants.

Clarifications:
1. AS 10 applies to PPE used to develop or maintain the assets described above.
2. Investment property (defined in AS 13), should be accounted for only in accordance
with the Cost model prescribed in this standard.
3. Definition of Property, Plant and Equipment (PPE)
There are 2 conditions to be satisfied for a TANGIBLE item to be called PPE. PPE are
tangible items that:
Use in Production or Supply of
Goods or Services
Condition 1:
For Rental to others
Held for
PPE
For Administrative purposes
(Tangible Items)
Condition 2:
Used for more than 12 months
Expected to be
Note: Intangible items are covered under AS 26.

Administrative purposes: The term Administrative purposes has been used in wider
sense to include all business purposes. Thus, PPE would include assets used for:
Selling and distribution
Finance and accounting
Personnel and other functions
of an Enterprise.
Items of PPE may also be acquired for safety or environmental reasons.
The acquisition of such PPE, although not directly increasing the future economic benefits
of any particular existing item of PPE, may be necessary for an enterprise to obtain the
future economic benefits from its other assets.
Such items of PPE qualify for recognition as assets because they enable an enterprise to
derive future economic benefits from related assets in excess of what could be derived had
those items not been acquired.
Example: A chemical manufacturer may install new chemical handling processes to comply
with environmental requirements for the production and storage of dangerous chemicals;
related plant enhancements are recognised as an asset because without them the
enterprise is unable to manufacture and sell chemicals.

The resulting carrying amount of such an asset and related assets is reviewed for
impairment in accordance with AS 28 (Impairment of Assets).
4. Other Definitions
I Biological Asset: An Accounting Standard on Agriculture is under formulation,
which will, inter alia, cover accounting for livestock. Till the time, the Accounting
Standard on Agriculture is issued, accounting for livestock meeting the definition of
PPE, will be covered as per AS 10 (Revised).
Living Animal AS 10 does not apply
Biological Asset
AS 10 applies to
Plant
Bearer Plants
II. Bearer Plant: Is a plant that (satisfies all 3 conditions):
Is used in the production or Of Agricultural

supply produce
For more than a

Is expected to bear produce
period of 12 months
Has a remote likelihood of

Except for incidental
being sold as Agricultural
scrap sales
produce
Note: When bearer plants are no longer used to bear produce they might be cut down
and sold as scrap. For example - use as firewood. Such incidental scrap sales would
not prevent the plant from satisfying the definition of a Bearer Plant.

The resulting carrying amount of such an asset and related assets is reviewed for
impairment in accordance with AS 28 (Impairment of Assets).
4. Other Definitions
I Biological Asset: An Accounting Standard on Agriculture is under formulation,
which will, inter alia, cover accounting for livestock. Till the time, the Accounting
Standard on Agriculture is issued, accounting for livestock meeting the definition of
PPE, will be covered as per AS 10 (Revised).
Living Animal AS 10 does not apply
Biological Asset
AS 10 applies to
Plant
Bearer Plants
II. Bearer Plant: Is a plant that (satisfies all 3 conditions):
Is used in the production or Of Agricultural

supply produce
For more than a

Is expected to bear produce
period of 12 months
Has a remote likelihood of

Except for incidental
being sold as Agricultural
scrap sales
produce
Note: When bearer plants are no longer used to bear produce they might be cut down
and sold as scrap. For example - use as firewood. Such incidental scrap sales would
not prevent the plant from satisfying the definition of a Bearer Plant.

The following are not Bearer Plants:

(a) Plants cultivated to be harvested as Agricultural produce
Example: Trees grown for use as lumber
(b) Plants cultivated to produce Agricultural produce when there is more than a
remote likelihood that the entity will also harvest and sell the plant as
agricultural produce, other than as incidental scrap sales
Example: Trees which are cultivated both for their fruit and their lumber
(c) Annual crops
Example: Maize and wheat
What are not
"Bearer Plants"
Plants cultivated to be Plants cultivated to Annual Crops

harvested as Agricultural Produce Agricultural produce
produce
And
Harvest and sell the plant as Maize and wheat
Trees grown for use Agricultural produce
as lumber
Trees which are cultivated both for

their fruit and their lumber
Agricultural Produce is the harvested product of Biological Assets of the

enterprise.
III. Agricultural Activity: Is the management by an Enterprise of:
Biological transformation; and
Harvest of Biological Assets
o For sale, Or
o For conversion into Agricultural Produce, Or
o Into additional Biological Assets

Biological
Transfomation
For Sale
Agricultural
Management
Activity For Conversion
Harvest of
into Agriculture
Biological Assets
Produce
Into Additional
Biological Assets
5. Recognition Criteria for PPE

The cost of an item of PPE should be recognised as an asset if, and only if:
(a) It is probable that future economic benefits associated with the item will flow to the
enterprise, and
(b) The cost of the item can be measured reliably.
Notes:
1. It may be appropriate to aggregate individually insignificant items, such as
moulds, tools and dies and to apply the criteria to the aggregate value.
2. An enterprise may decide to expense an item which could otherwise have been
included as PPE, because the amount of the expenditure is not material.
When do we apply the above criteria for Recognition?
An enterprise evaluates under this recognition principle all its costs on PPE at the time
they are incurred.
These costs include costs incurred:
Situation I To acquire or
construct an item of
Initially PPE
Cost Incurred
Situation II To add to, replace part
Subsequently of, or service it

6. Treatment of Spare Parts, Stand by Equipment and Servicing Equipment

Case I If they meet the definition of PPE as per AS 10:
Recognised as PPE as per AS 10
Case II If they do not meet the definition of PPE as per AS 10:
Such items are classified as Inventory as per AS 2
Illustration 1 (Capitalising the cost of Remodelling a Supermarket)
Entity A, a supermarket chain, is renovating one of its major stores. The store will have more
available space for in store promotion outlets after the renovation and will include a restaurant.
Management is preparing the budgets for the year after the store reopens, which include the cost
of remodelling and the expectation of a 15% increase in sales resulting from the store renovations,
which will attract new customers. State whether the remodeling cost will be capitalized or not.
Solution
The expenditure in remodelling the store will create future economic benefits (in the form of 15%
of increase in sales) and the cost of remodelling can be measured reliably, therefore, it should be
capitalised.
7. Treatment of Subsequent Costs
7.1 Cost of day-to-day servicing
Meaning:
Costs of day-to-day servicing are primarily the costs of labour and consumables, and
may include the cost of small parts. The purpose of such expenditures is often
described as for the Repairs and Maintenance of the item of PPE.
Accounting Treatment:
An enterprise does not recognise in the carrying amount of an item of PPE the costs
of the day-to-day servicing of the item. Rather, these costs are recognised in the
Statement of Profit and Loss as incurred.
7.2 Replacement of Parts of PPE
Parts of some items of PPE may require replacement at regular intervals.
Examples:
1. A furnace may require relining after a specified number of hours of use.
2. Aircraft interiors such as seats and galleys may require replacement several
times during the life of the airframe.
3. Major parts of conveyor system, such as, conveyor belts, wire ropes, etc., may
require replacement several times during the life of the conveyor system.
4. Replacing the interior walls of a building, or to make a non-recurring
replacement.

An enterprise recognises in the carrying amount of an item of PPE the cost of
replacing part of such an item when that cost is incurred if the recognition criteria are
met.
Note: The carrying amount of those parts that are replaced is derecognised in
accordance with the de-recognition provisions of this Standard.
7.3 Regular Major Inspections - Accounting Treatment
When each major inspection is performed, its cost is recognised in the carrying
amount of the item of PPE as a replacement, if the recognition criteria are satisfied.
Any remaining carrying amount of the cost of the previous inspection (as distinct from
physical parts) is derecognised.
Illustration 2
What happens if the cost of the previous part/inspection was/ was not identified in the
transaction in which the item was acquired or constructed? (Related to Issue 2 and 3)
Solution
De-recognition of the carrying amount occurs regardless of whether the cost of the previous
part/inspection was identified in the transaction in which the item was acquired or constructed.
Illustration 3
What will be your answer in the above question, if it is not practicable for an enterprise to
determine the carrying amount of the replaced part/inspection?
Solution
It may use the cost of the replacement or the estimated cost of a future similar inspection as
an indication of what the cost of the replaced part/existing inspection component was when
the item was acquired or constructed.
8. Measurement of PPE
At Recognition Cost Model
Measurement
Cost Model
After Recognition
Revaluation
Model

9. Measurement at Recognition
An item of PPE that qualifies for recognition as an asset should be measured at its cost.
What are the elements of Cost?
Cost of an item of PPE comprises:
Cost of an Item of PPE
Includes Excludes
Costs of opening a new facility

Any Directly Decommissioning, or business (Such as,
Purchase Price Attributable Restoration and Inauguration costs)
Costs similar Liabilities
Costs of introducing a new
product or service (including
costs of advertising and
promotional activities)
Costs of conducting business in
a new location or with a new
class of customer (including
costs of staff training)
Administration and other general
overhead costs
Let us understand the above in detail.

A. Purchase Price:
It includes import duties and non refundable purchase taxes.
It requires deduction of Trade discounts and rebates
B. Directly Attributable Costs:
Any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management
Recognition of costs in the carrying amount of an item of PPE ceases when the item is in
the location and condition necessary for it to be capable of operating in the manner
intended by management.
Examples of directly attributable costs are:
1. Costs of employee benefits (as defined in AS 15) arising directly from the construction
or acquisition of the item of PPE

2. Costs of site preparation

3. Initial delivery and handling costs
4. Installation and assembly costs
5. Costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced while bringing the asset to that location
and condition (such as samples produced when testing equipment)
6. Professional fees
The following costs are not included in the carrying amount of an item of PPE:
1. Costs incurred while an item capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full capacity.
2. Initial operating losses, such as those incurred while demand for the output of an item
builds up. And
3. Costs of relocating or reorganising part or all of the operations of an enterprise.
Note: Some operations occur in connection with the construction or development of an
item of PPE, but are not necessary to bring the item to the location and condition necessary
for it to be capable of operating in the manner intended by management. These incidental
operations may occur before or during the construction or development activities.
Example: Income may be earned through using a building site as a car park until
construction starts because incidental operations are not necessary to bring an item to the
location and condition necessary for it to be capable of operating in the manner intended
by management, the income and related expenses of incidental operations are recognised
in the Statement of Profit and Loss and included in their respective classifications of
income and expense.
Illustration 4
Entity A has an existing freehold factory property, which it intends to knock down and redevelop.
During the redevelopment period the company will move its production facilities to another
(temporary) site. The following incremental costs will be incurred:
1. Setup costs of ` 5,00,000 to install machinery in the new location.
2. Rent of ` 15,00,000
3. Removal costs of ` 3,00,000 to transport the machinery from the old location to the temporary
location.
Can these costs be capitalised into the cost of the new building?
Solution
Constructing or acquiring a new asset may result in incremental costs that would have been avoided if
the asset had not been constructed or acquired. These costs are not to be included in the cost of the
asset if they are not directly attributable to bringing the asset to the location and condition necessary for

it to be capable of operating in the manner intended by management. The costs to be incurred by the
company do not meet the requirement of AS 10 and therefore, cannot be capitalised.
Illustration 5 (Capitalisation of directly attributable costs)
Entity A, which operates a major chain of supermarkets, has acquired a new store location. The
new location requires significant renovation expenditure. Management expects that the renovations
will last for 3 months during which the supermarket will be closed.
Management has prepared the budget for this period including expenditure related to construction
and remodelling costs, salaries of staff who will be preparing the store before its opening and
related utilities costs. What will be the treatment of such expenditures?
Solution
Management should capitalise the costs of construction and remodelling the supermarket, because
they are necessary to bring the store to the condition necessary for it to be capable of operating in
the manner intended by management. The supermarket cannot be opened without incurring the
remodelling expenditure, and thus the expenditure should be considered part of the asset.
However, the cost of salaries, utilities and storage of goods are operating expenditures that would
be incurred if the supermarket was open. These costs are not necessary to bring the store to the
condition necessary for it to be capable of operating in the manner intended by management and
should be expensed.
Illustration 6 (Operating costs incurred in the start-up period)
An amusement park has a 'soft' opening to the public, to trial run its attractions. Tickets are sold
at a 50% discount during this period and the operating capacity is 80%. The official opening day
of the amusement park is three months later. Management claim that the soft opening is a trial run
necessary for the amusement park to be in the condition capable of operating in the intended
manner. Accordingly, the net operating costs incurred should be capitalised. Comment.
Solution
The net operating costs should not be capitalised, but should be recognised in the Statement of
Profit and Loss.
Even though it is running at less than full operating capacity (in this case 80% of operating capacity),
there is sufficient evidence that the amusement park is capable of operating in the manner intended
by management. Therefore, these costs are specific to the start-up and, therefore, should be
expensed as incurred.
C. Decommissioning, Restoration and similar Liabilities:
Initial estimate of the costs of dismantling, removing the item and restoring the site on
which it is located, referred to as Decommissioning, Restoration and similar Liabilities,
the obligation for which an enterprise incurs either when the item is acquired or as a
consequence of having used the item during a particular period for purposes other than
to produce inventories during that period.

Exception: An enterprise applies AS 2 Valuation of Inventories, to the costs of

obligations for dismantling, removing and restoring the site on which an item is located that
are incurred during a particular period as a consequence of having used the item to
produce inventories during that period.
Note: The obligations for costs accounted for in accordance with AS 2 or AS 10 are
recognised and measured in accordance with AS 29 Provisions, Contingent Liabilities and
Contingent Assets.
10. Cost of a Self-constructed Asset
Cost of a self-constructed asset is determined using the same principles as for an acquired
asset.
1. If an enterprise makes similar assets for sale in the normal course of business, the
cost of the asset is usually the same as the cost of constructing an asset for sale (see
AS 2). Therefore, any internal profits are eliminated in arriving at such costs.
2. Cost of abnormal amounts of wasted material, labour, or other resources incurred
in self constructing an asset is not included in the cost of the asset.
3. AS 16 on Borrowing Costs, establishes criteria for the recognition of interest as a
component of the carrying amount of a self-constructed item of PPE.
4. Bearer plants are accounted for in the same way as self-constructed items of PPE
before they are in the location and condition necessary to be capable of operating in
the manner intended by management.
11. Measurement of Cost
Cost of an item of PPE is the cash price equivalent at the recognition date.
A. If payment is deferred beyond normal credit terms:
Total payment - Cash price equivalent
Is recognised as Interest over the period of credit
unless such interest is capitalised in accordance with AS 16
B. PPE acquired in Exchange for a Non-monetary Asset or Assets Or A
combination of Monetary and Non-monetary Assets:
Cost of such an item of PPE is measured at fair value unless:
(a) Exchange transaction lacks commercial substance; Or
(b) Fair value of neither the asset(s) received nor the asset(s) given up is reliably
measurable.
Note:
1. The acquired item(s) is/are measured in this manner even if an enterprise cannot
immediately derecognise the asset given up.

2. If the acquired item(s) is/are not measured at fair value, its/their cost is
measured at the carrying amount of the asset(s) given up.
Illustration 7 (Consideration received comprising a combination of non-
monetary and monetary assets)
Entity A exchanges surplus land with a book value of ` 10,00,000 for cash of ` 20,00,000
and plant and machinery valued at ` 25,00,000. What will be the measurement cost of the
assets received?
Solution
Since the transaction has commercial substance. The plant and machinery would be
recorded at ` 25,00,000, which is equivalent to the fair value of the land of ` 45,00,000 less
the cash received of ` 20,00,000.
Illustration 8 (Exchange of assets that lack commercial substance)
Entity A exchanges car X with a book value of ` 13,00,000 and a fair value of ` 13,25,000 for
cash of ` 15,000 and car Y which has a fair value of ` 13,10,000. The transaction lacks
commercial substance as the companys cash flows are not expected to change as a result
of the exchange. It is in the same position as it was before the transaction. What will be the
measurement cost of the assets received?
Solution
The entity recognises the assets received at the book value of car X. Therefore, it recognises
cash of ` 15,000 and car Y as PPE with a carrying value of ` 12,85,000.
C. PPE purchased for a Consolidated Price:

Where several items of PPE are purchased for a consolidated price, the consideration
is apportioned to the various items on the basis of their respective fair values at the
date of acquisition.
Note: In case the fair values of the items acquired cannot be measured reliably,
these values are estimated on a fair basis as determined by competent valuers.
D. PPE held by a lessee under a Finance Lease:
The cost of an item of PPE held by a lessee under a finance lease is determined in
accordance with AS 19 (Leases).
E. Government Grant related to PPE:
The carrying amount of an item of PPE may be reduced by government grants in
accordance with AS 12 (Accounting for Government Grants).

12. Measurement after Recognition

An enterprise should choose
Either Cost model,
Or Revaluation model
as its accounting policy and should apply that policy to an entire class of PPE.
Class of PPE: A class of PPE is a grouping of assets of a similar nature and use in
operations of an enterprise.
Examples of separate classes:
(a) Land
(b) Land and Buildings
(c) Machinery
(d) Ships
(e) Aircraft
(f) Motor Vehicles
(g) Furniture and Fixtures
(h) Office Equipment
(i) Bearer plants
13. Cost Model
After recognition as an asset, an item of PPE should be carried at:
Cost - Any Accumulated Depreciation - Any Accumulated Impairment losses
14. Revaluation Model
After recognition as an asset, an item of PPE whose fair value can be measured reliably
should be carried at a revalued amount.
Fair value at the date of the revaluation -
Less: Any subsequent accumulated depreciation (-)
Less: Any subsequent accumulated impairment losses (-)
Carrying value =
14.1 Revaluation for entire class of PPE
If an item of PPE is revalued, the entire class of PPE to which that asset belongs
should be revalued.

Reason:
The items within a class of PPE are revalued simultaneously to avoid selective
revaluation of assets and the reporting of amounts in the Financial Statements that
are a mixture of costs and values as at different dates.
Illustration 9 (Revaluation on a class by class basis)
Entity A is a large manufacturing group. It owns a number of industrial buildings, such as
factories and warehouses and office buildings in several capital cities. The industrial
buildings are located in industrial zones, whereas the office buildings are in central
business districts of the cities. Entity A's management want to apply the revaluation model
as per AS 10 to the subsequent measurement of the office buildings but continue to apply
the historical cost model to the industrial buildings.
State whether this is acceptable under AS 10 or not with reasons?
Solution
Entity A's management can apply the revaluation model only to the office buildings. The office
buildings can be clearly distinguished from the industrial buildings in terms of their function,
their nature and their general location. AS 10 permits assets to be revalued on a class by
class basis.
The different characteristics of the buildings enable them to be classified as different PPE
classes. The different measurement models can, therefore, be applied to these classes for
subsequent measurement.
All properties within the class of office buildings must, therefore, be carried at revalued
amount.
14.2 Frequency of Revaluations
Revaluations should be made with sufficient regularity to ensure that the carrying
amount does not differ materially from that which would be determined using Fair
value at the Balance Sheet date.
The frequency of revaluations depends upon the changes in fair values of the items
of PPE being revalued.
When the fair value of a revalued asset differs materially from its carrying amount, a
further revaluation is required.
A. Items of PPE experience significant and volatile changes in Fair value
Annual revaluation shall be done.
B. Items of PPE with only insignificant changes in Fair value
Revaluation shall be done at an interval of 3 or 5 years.

Frequency of
Revaluations
(Sufficient Regularity)
Items of PPE experience Items of PPE with only

significant and volatile insignificant changes in
changes in Fair value Fair value
Revalue the item only

Annual revaluation
every 3 or 5 years
14.3 Determination of Fair Value

Fair value of items of PPE is usually determined from market-based evidence by
appraisal that is normally undertaken by professionally qualified valuers.
If there is no market-based evidence of fair value because of the specialised nature
of the item of PPE and the item is rarely sold, except as part of a continuing business,
an enterprise may need to estimate fair value using an income approach.
Example:
Based on
Discounted cash flow projections, Or
A depreciated replacement cost approach
Which aims at making a realistic estimate of the current cost of acquiring or
constructing an item that has the same service potential as the existing item.
14.4 Accounting Treatment of Revaluations
When an item of PPE is revalued, the carrying amount of that asset is adjusted to the
revalued amount.
At the date of the revaluation, the asset is treated in one of the following ways:
A. Technique 1: Gross carrying amount is adjusted in a manner that is consistent
with the revaluation of the carrying amount of the asset.
Gross carrying amount
May be restated by reference to observable market data, or
May be restated proportionately to the change in the carrying amount.

Accumulated depreciation at the date of the revaluation is

Adjusted to equal the difference between the gross carrying amount and
the carrying amount of the asset after taking into account accumulated
impairment losses
Case Study on Technique I
PPE is revalued to ` 1,500 consisting of ` 2,500 Gross cost and ` 1,000
Depreciation based on observable market data.
Details of the PPE before and after revaluation are as follows:
Particulars Cost/Revalu Accumulated Net
ed Cost depreciation book
value
PPE before revaluation 1,000 400 600
Fair Value 1,500
Revaluation Gain 900
Gain allocated proportionately 1,500 600 900
to cost and depreciation
PPE after revaluation 2,500 1,000 1,500
The increase on revaluation is ` 900 (i.e., ` 1,500 ` 600).
B. Technique 2: Accumulated depreciation Is eliminated against the Gross
Carrying amount of the asset
Case Study on Technique II
(Taking the information given in the above Example)
Details of the PPE before and after revaluation are as follows:
Particulars Cost/Revalued Accumulated Net book
Cost depreciation value
PPE before revaluation 1,000 400 600
PPE after revaluation 1,500 1,500
Revaluation gain 500 400
The increase on revaluation is ` 900 (i.e., ` 500 + ` 400).

14.5 Revaluation - Increase or Decrease
Revaluation
Increase Decrease
Credited directly to Exception: Charged to the Exception:

owners interests When it is Statement of When it is subsequent
under the heading subsequent profit and loss Decrease (Initially
of Revaluation Increase (Initially Increase)
surplus Decrease)
Decrease should be
debited directly to
Recognised in the owners interests
Statement of profit and under the heading of
loss to the extent that it Revaluation surplus
reverses a revaluation to the extent of any
decrease of the same credit balance
asset previously existing in the
recognised in the Revaluation surplus
Statement of profit and in respect of that
loss asset
14.6 Treatment of Revaluation Surplus

The revaluation surplus included in owners interests in respect of an item of PPE
may be transferred to the Revenue Reserves when the asset is derecognised.
Case I : When whole surplus is transferred:
When the asset is:
Retired; Or
Disposed of
Case II : Some of the surplus may be transferred as the asset is used by an
enterprise:
In such a case, the amount of the surplus transferred would be:
Depreciation (based on Revalued Carrying amount) Depreciation (based on Original
Cost)
Transfers from Revaluation Surplus to the Revenue Reserves are not made through
the Statement of Profit and Loss.

15. Depreciation
Component Method of Depreciation:
Each part of an item of PPE with a cost that is significant in relation to the total cost of
the item should be depreciated separately.
Example: It may be appropriate to depreciate separately the airframe and engines of an
aircraft, whether owned or subject to a finance lease.
Is Grouping of Components possible?
Yes.
A significant part of an item of PPE may have a useful life and a depreciation method that
are the same as the useful life and the depreciation method of another significant part of
that same item. Such parts may be grouped in determining the depreciation charge.
Depreciation charge for each period should be recognised in the Statement of Profit and
Loss unless it is included in the carrying amount of another asset.
Examples on Exception:
AS 2: Depreciation of manufacturing plant and equipment is included in the costs of
conversion of inventories as per AS 2.
AS 26: Depreciation of PPE used for development activities may be included in the cost of
an intangible asset recognised in accordance with AS 26 on Intangible Assets.
16. Depreciable Amount and Depreciation Period
16.1 What is Depreciable Amount?
Depreciable amount is:
Cost of an asset (or other amount substituted for cost i.e. revalued amount) - Residual value
The depreciable amount of an asset should be allocated on a systematic basis over
its useful life.
Illustration 10
Entity A has a policy of not providing for depreciation on PPE capitalised in the year until the
following year, but provides for a full year's depreciation in the year of disposal of an asset. Is this
acceptable?
Solution
The depreciable amount of a tangible fixed asset should be allocated on a systematic basis over
its useful life. The depreciation method should reflect the pattern in which the asset's future
economic benefits are expected to be consumed by the entity.
Useful life means the period over which the asset is expected to be available for use by the entity.
Depreciation should commence as soon as the asset is acquired and is available for use.

16.2 Review of Residual Value and Useful Life of an Asset

Residual value and the useful life of an asset should be reviewed at least at each
financial year-end and, if expectations differ from previous estimates, the change(s)
should be accounted for as a change in an accounting estimate in accordance with
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies.
Illustration 11 (Change in estimate of useful life)
Entity A purchased an asset on 1st January 2013 for ` 1,00,000 and the asset had an
estimated useful life of 10 years and a residual value of nil.
On 1st January 2017, the directors review the estimated life and decide that the asset will
probably be useful for a further 4 years.
Calculate the amount of depreciation for each year, if company charges depreciation on
Straight Line basis.
Solution
The entity has charged depreciation using the straight-line method at ` 10,000 per annum i.e
(1,00,000/10 years).
On 1st January 2017, the asset's net book value is [1,00,000 (10,000 x 4)] ` 60,000.
The remaining useful life is 4 years.
The company should amend the annual provision for depreciation to charge the unamortised
cost over the revised remaining life of four years.
Consequently, it should charge depreciation for the next 4 years at ` 15,000 per annum i.e.
(60,000 / 4 years).
Note: Depreciation is recognised even if the Fair value of the Asset exceeds its
Carrying Amount. Repair and maintenance of an asset do not negate the need to
depreciate it.
16.3 Commencement of period for charging Depreciation
Depreciation of an asset begins when it is available for use, i.e., when it is in the
location and condition necessary for it to be capable of operating in the manner
intended by the management.
Illustration 12
Entity B constructs a machine for its own use. Construction is completed on 1st November
2016 but the company does not begin using the machine until 1st March 2017. Comment
Solution
The entity should begin charging depreciation from the date the machine is ready for use
that is, 1st November 2016. The fact that the machine was not used for a period after it was
ready to be used is not relevant in considering when to begin charging depreciation.

16.4 Cessation of Depreciation

I. Depreciation ceases to be charged when assets residual value exceeds
its carrying amount
The residual value of an asset may increase to an amount equal to or greater
than its carrying amount. If it does, depreciation charge of the asset is zero
unless and until its residual value subsequently decreases to an amount below
its carrying amount.
Illustration 13 (Depreciation where residual value is the same as or close
to Original cost)
A property costing ` 10,00,000 is bought in 2016. Its estimated total physical life is 50
years. However, the company considers it likely that it will sell the property after 20
years.
The estimated residual value in 20 years' time, based on 2016 prices, is:
Case (a) ` 10,00,000
Case (b) ` 9,00,000.
Calculate the amount of depreciation.
Solution
Case (a)
The company considers that the residual value, based on prices prevailing at the
balance sheet date, will equal the cost.
There is, therefore, no depreciable amount and depreciation is correctly zero.
Case (b)
The company considers that the residual value, based on prices prevailing at the
balance sheet date, will be ` 9,00,000 and the depreciable amount is, therefore,
` 1,00,000.
Annual depreciation (on a straight line basis) will be ` 5,000 [{10,00,000 9,00,000}
20].
II. Depreciation of an asset ceases at the earlier of:
The date that the asset is retired from active use and is held for disposal,
and
The date that the asset is derecognised
Therefore, depreciation does not cease when the asset becomes idle or is
retired from active use (but not held for disposal) unless the asset is fully
depreciated.

However, under usage methods of depreciation, the depreciation charge can be

zero while there is no production.
16.5 Land and Buildings
Land and buildings are separable assets and are accounted for separately, even
when they are acquired together.
A. Land: Land has an unlimited useful life and therefore is not depreciated.
Exceptions: Quarries and sites used for landfill.
Depreciation on Land:
I. If land itself has a limited useful life:
It is depreciated in a manner that reflects the benefits to be derived from it.
II. If the cost of land includes the costs of site dismantlement, removal
and restoration:
That portion of the land asset is depreciated over the period of benefits
obtained by incurring those costs.
B. Buildings:
Buildings have a limited useful life and therefore are depreciable assets.
An increase in the value of the land on which a building stands does not affect
the determination of the depreciable amount of the building.
17. Depreciation Method
The depreciation method used should reflect the pattern in which the future economic
benefits of the asset are expected to be consumed by the enterprise.
The method selected is applied consistently from period to period unless:
There is a change in the expected pattern of consumption of those future economic
benefits; Or
That the method is changed in accordance with the statute to best reflect the way the
asset is consumed.

Methods of
Depreciation
Units of
Straight-line Diminishing
Production
Method Balance Method
Method
Results in a constant
charge over the useful Results in a Results in a charge
life if the residual decreasing charge based on the expected
value of the asset over the useful life use or output
does not change
Review of Depreciation Method:

The depreciation method applied to an asset should be reviewed at least at each financial
year-end and, if there has been a significant change in the expected pattern of
consumption of the future economic benefits embodied in the asset, the method should be
changed to reflect the changed pattern.
Such a change should be accounted for as a change in an accounting estimate in
accordance with AS 5.
Depreciation Method based on Revenue:
A depreciation method that is based on revenue that is generated by an activity that
includes the use of an asset is not appropriate.
Illustration 14 (Determination of appropriate Depreciation Method)
Entity B manufactures industrial chemicals and uses blending machines in the production process.
The output of the blending machines is consistent from year to year and they can be used for
different products.
However, maintenance costs increase from year to year and a new generation of machines with
significant improvements over existing machines is available every 5 years. Suggest the
depreciation method to the management.
Solution
Management should determine the depreciation method based on production output. The straight-
line depreciation method should be adopted, because the production output is consistent from year
to year.
Factors such as maintenance costs or technical obsolescence should be considered in determining
the blending machines useful life.

18. Changes in Existing Decommissioning, Restoration and other Liabilities

The cost of PPE may undergo changes subsequent to its acquisition or construction on
account of:
Changes in Liabilities
Price Adjustments
Changes in Duties
Changes in initial estimates of amounts provided for Dismantling, Removing,
Restoration, and
Similar factors
The above are included in the cost of the asset.
Accounting for the above changes:
Related Asset is measured

using Cost Model
Accounitng
(Depends upon)
Related Asset is measured
using Revaluation Model
A. If the related asset is measured using the Cost model:

Changes in the Liability should be added to, or deducted from, the cost of the related
asset in the current period
Note: Amount deducted from the cost of the asset should not exceed its carrying
amount. If a decrease in the liability exceeds the carrying amount of the asset, the
excess should be recognised immediately in the Statement of Profit and Loss.
If the adjustment results in an addition to the cost of an asset:
Enterprise should consider whether this is an indication that the new carrying
amount of the asset may not be fully recoverable.
Note: If it is such an indication, the enterprise should test the asset for impairment by
estimating its recoverable amount, and should account for any impairment loss, in
accordance with AS 28.
B. If the related asset is measured using the Revaluation model:
Changes in the liability alter the revaluation surplus or deficit previously recognised
on that asset, so that:

(i) Decrease in the liability credited directly to revaluation surplus in the owners
interest
Exception:
It should be recognised in the Statement of Profit and Loss to the extent
that it reverses a revaluation deficit on the asset that was previously
recognised in the Statement of Profit and Loss
Note: In the event that a decrease in the liability exceeds the carrying amount
that would have been recognised had the asset been carried under the cost
model, the excess should be recognised immediately in the Statement of Profit
and Loss.
(ii) Increase in the liability should be recognised in the Statement of Profit and Loss
Exception:
It should be debited directly to Revaluation surplus in the owners interest
to the extent of any credit balance existing in the Revaluation surplus in
respect of that asset
Caution:
A change in the liability is an indication that the asset may have to be revalued
in order to ensure that the carrying amount does not differ materially from that
which would be determined using fair value at the balance sheet date.
What happens if the related asset has reached the end of its useful life?
All subsequent changes in the liability should be recognised in the Statement of
Profit and Loss as they occur.
Note: This applies under both the cost model and the revaluation model.
19. Impairment
To determine whether an item of PPE is impaired, an enterprise applies AS 28 on
Impairment of Assets.
AS 28 explains how an enterprise:
Reviews the carrying amount of its Assets
How it determines the Recoverable Amount of an Asset, and
When it Recognises, or Reverses the recognition of, an Impairment loss
20. Compensation for Impairment
Compensation from third parties for items of PPE that were impaired, lost or given up
should be included in the Statement of Profit and Loss when the compensation becomes
receivable.

Situations and Its

Accounting
De-recognition of Compensation from Cost of items of PPE

Impairments of items of PPE third parties for restored, purchased
items of PPE retired or items of PPE that or constructed as
disposed of were impaired, lost replacements
or given up
Recognised in Determined in Is determined in

accordance with accordance with Is included in accordance with
AS 28 AS 10 determining profit or AS 10
loss when it becomes
receivable
Illustration 15 (Gain on replacement of Insured Assets)

Entity A carried plant and machinery in its books at ` 2,00,000. These were destroyed in a fire.
The assets were insured 'New for old' and were replaced by the insurance company with new
machines that cost ` 20,00,000. The machines were acquired by the insurance company and the
company did not receive the ` 20,00,000 as cash compensation. State, how Entity A should
account for the same?
Solution
Entity A should account for a loss in the Statement of Profit and Loss on de-recognition of the
carrying value of plant and machinery in accordance with AS 10.
Entity A should separately recognise a receivable and a gain in the income statement resulting from
the insurance proceeds under AS 29 once receipt is virtually certain. The receivable should be
measured at the fair value of assets that will be provided by the insurer.
21. Retirements
Items of PPE retired from active use and held for disposal should be stated at the
lower of:
Carrying Amount, and
Net Realisable Value
Note: Any write-down in this regard should be recognised immediately in the Statement of
Profit and Loss.
22. De-recognition
The carrying amount of an item of PPE should be derecognised:
On disposal
By sale

By entering into a finance lease, or

By donation, Or
When no future economic benefits are expected from its use or disposal
Gain or loss arising from de-recognition of an item of PPE should be included in the
Statement of Profit and Loss when the item is derecognized unless AS 19 on Leases,
requires otherwise on a sale and leaseback (AS 19 on Leases, applies to disposal by a
sale and leaseback.)
Where,
Gain or loss arising from de-recognition of an item of PPE
= Net disposal proceeds (if any) - Carrying Amount of the item
Note: Gains should not be classified as revenue, as defined in AS 9 Revenue
Recognition.
Exception:
An enterprise that in the course of its ordinary activities, routinely sells items of PPE that
it had held for rental to others should transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale.
The proceeds from the sale of such assets should be recognised in revenue in accordance
with AS 9 on Revenue Recognition.
Determining the date of disposal of an item:
An enterprise applies the criteria in AS 9 for recognising revenue from the sale of goods.
23. Disclosure
Disclosures
Disclosures
related to
General Additional
Revalued
Assets
23.1 General Disclosures:

The financial statements should disclose, for each class of PPE:
(a) The measurement bases (i.e., cost model or revaluation model) used for
determining the gross carrying amount;

(b) The depreciation methods used;

(c) The useful lives or the depreciation rates used.
(d) In case the useful lives or the depreciation rates used are different from those
specified in the statute governing the enterprise, it should make a specific
mention of that fact;
(e) The gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period; and
(f) A reconciliation of the carrying amount at the beginning and end of the period
showing:
23.2 Additional Disclosures:
The financial statements should also disclose:
(a) The existence and amounts of restrictions on title, and property, plant and
equipment pledged as security for liabilities;
(b) The amount of expenditure recognised in the carrying amount of an item of
property, plant and equipment in the course of its construction;
(c) The amount of contractual commitments for the acquisition of property, plant
and equipment;
(d) If it is not disclosed separately on the face of the statement of profit and loss,
the amount of compensation from third parties for items of property, plant and
equipment that were impaired, lost or given up that is included in the statement
of profit and loss; and
(e) The amount of assets retired from active use and held for disposal.
23.3 Disclosures related to Revalued Assets:
If items of property, plant and equipment are stated at revalued amounts, the following
should be disclosed:
(a) The effective date of the revaluation;
(b) Whether an independent valuer was involved;
(c) The methods and significant assumptions applied in estimating fair values of the
items;
(d) The extent to which fair values of the items were determined directly by
reference to observable prices in an active market or recent market transactions
on arms length terms or were estimated using other valuation techniques; and
(e) The revaluation surplus, indicating the change for the period and any restrictions
on the distribution of the balance to shareholders.

24. Transitional Provisions

24.1 Previously Recognised Revenue Expenditure
Where an entity has in past recognized an expenditure in the Statement of Profit and
Loss which is eligible to be included as a part of the cost of a project for construction
of PPE in accordance with the requirements of this standard:
It may do so retrospectively for such a project.
Note: The effect of such retrospective application, should be recognised net-of-tax
in Revenue reserves.
24.2 PPE acquired in Exchange of Assets
The requirements of AS 10 regarding the initial measurement of an item of PPE
acquired in an exchange of assets transaction should be applied prospectively only
to transactions entered into after this Standard becomes mandatory.
24.3 Spare parts
On the date of this Standard becoming mandatory, the spare parts, which hitherto
were being treated as inventory under AS 2, and are now required to be capitalised
in accordance with the requirements of this Standard, should be capitalised at their
respective carrying amounts.
Note: The spare parts so capitalised should be depreciated over their remaining
useful lives prospectively as per the requirements of this Standard.
24.4 Revaluations
The requirements of AS 10 regarding the revaluation model should be applied
prospectively.
In case, on the date of this Standard becoming mandatory, an enterprise does not
adopt the revaluation model as its accounting policy but the carrying amount of
item(s) of PPE reflects any previous revaluation it should adjust the amount
outstanding in the Revaluation reserve against the carrying amount of that item.
Note: The carrying amount of that item should never be less than residual value. Any
excess of the amount outstanding as Revaluation reserve over the carrying amount
of that item should be adjusted in Revenue reserves.
Reference: The students are advised to refer the full text of AS 10 Property,
Plant and Equipment (Revised 2016).

Appendix II
Ind AS 11: Construction Contracts

Ind AS 11 prescribes the accounting treatment of revenue and costs associated with
construction contracts. Because of the nature of the activity undertaken in construction
contracts, the date at which the contract activity is entered into and the date when the activity
is completed usually fall into different accounting periods. Therefore, the primary issue in
accounting for construction contracts is the allocation of contract revenue and contract costs to
the accounting periods in which construction work is performed.
1. Scope
The Standard shall be applied in accounting for construction contracts in the financial
statements of contractors A construction contract is a contract specifically negotiated for the
construction of an asset or a combination of assets that are closely interrelated or
interdependent in terms of their design, technology and function or their ultimate purpose or
use.
The requirements of this Standard are usually applied separately to each construction contract.
However, in certain circumstances, it is necessary to apply the Standard to the separately
identifiable components of a single contract or to a group of contracts together in order to reflect
the substance of a contract or a group of contracts.
Contract revenue shall comprise:
(a) the initial amount of revenue agreed in the contract; and
(b) variations in contract work, claims and incentive payments:
(i) to the extent that it is probable that they will result in revenue; and
(ii) they are capable of being reliably measured. Contract revenue is measured at the
fair value of the consideration received or receivable.
Contract costs shall comprise:
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be allocated to the
contract; and
(c) such other costs as are specifically chargeable to the customer under the terms of the
contract.
2. Recognition of Contract Revenue and Expenses
When the outcome of a construction contract can be estimated reliably, contract revenue and
contract costs associated with the construction contract shall be recognised as revenue and

expenses respectively by reference to the stage of completion of the contract activity at the end
of the reporting period.
When the outcome of a construction contract cannot be estimated reliably:
(a) revenue shall be recognised only to the extent of contract costs incurred that it is probable
will be recoverable; and
(b) contract costs shall be recognised as an expense in the period in which they are incurred
3. Recognition of Expected Losses
When it is probable that total contract costs will exceed total contract revenue, the expected
loss shall be recognised as an expense immediately.
An entity shall disclose the amount recognised as contract revenue in the period, the method
used to determine the contract revenue recognised and stage of completion of contracts in
progress.
For the contracts in progress at the end of the period, an entity shall disclose the aggregate
costs incurred and recognised profits to date, the amounts of retentions and advances received.
Appendix A of Ind AS 11 gives guidance on accounting by operators for publicto- private service
concession arrangements. It sets out principles for recognition and measurement of the
obligations and related rights in service concession arrangements. The Appendix prescribes
that an operator shall not recognise the public service infrastructure (within the scope of this
appendix) as its Property, Plant and Equipment because the contractual service arrangement
does not convey the right to control the use of the infrastructure. It only gives operator the
access to operate the infrastructure to provide public service on behalf of the grantor.
The operator shall account for revenue and costs relating to construction or upgrade services
in accordance with Ind AS 11 and those relating to operation services in accordance with Ind
AS 18. The consideration received or receivable shall be recognised at its fair value. The
consideration may be rights to a financial asset or an intangible asset.
The operator recognises a financial asset to the extent that it has an unconditional contractual
right to receive cash or another financial asset from or at the direction of the grantor for the
construction services. The operator shall recognise an intangible asset to the extent that it
receives a right (a license) to charge users of the public service.
4. Major Changes in Ind AS 11 vis--vis Notified AS 7
(i) Inclusion of Borrowing costs: Existing AS 7 includes borrowing costs as per AS 16,
Borrowing Costs, in the costs that may be attributable to contract activity in general and
can be allocated to specific contracts, whereas Ind AS 11 does not specifically make
reference to Ind AS 23.

(ii) Fair Value: Existing AS 7 does not recognise fair value concept as contract revenue is
measured at consideration received/receivable, whereas Ind AS 11 requires that contract
revenue shall be measured at fair value of consideration received/receivable.
(iii) Accounting for Service Concession Arrangements: Existing AS 7 does not deal with
accounting for Service Concession Arrangements, i.e., the arrangement where private sector
entity (an operator) constructs or upgrades the infrastructure to be used to provide the public
service and operates and maintains that infrastructure for a specified period of time, whereas
Appendix A of Ind AS 11 deals with accounting aspects involved in such arrangements and
Appendix B of Ind AS 11 deals with disclosures of such arrangements.
Ind AS 18 : Revenue
The primary issue in accounting for revenue is determining when to recognise revenue.
Revenue is recognised when it is probable that future economic benefits will flow to the entity
and these benefits can be measured reliably. This Standard identifies the circumstances in
which these criteria will be met and, therefore, revenue will be recognised. It also provides
practical guidance on the application of these criteria.
Revenue is the gross inflow of economic benefits during the period arising in the course of the
ordinary activities of an entity when those inflows result in increases in equity, other than
increases relating to contributions from equity participants.
The Standard shall be applied in accounting for revenue arising from the following transactions
and events: (a) the sale of goods; (b) the rendering of services; and (c) the use by others of
entity assets yielding interest and royalties The Standard deals with recognition of interest.
However, measurement of interest and recognition and measurement of dividend are dealt in
accordance with Ind AS 109, Financial Instruments.
The impairment of any contractual right to receive cash or another financial asset arising from
this Standard shall be dealt in accordance with Ind AS 109, Financial Instruments.
1. Identification of the transaction
The recognition criteria in this Standard are usually applied separately to each transaction.
However, in certain circumstances, it is necessary to apply the recognition criteria to the
separately identifiable components of a single transaction in order to reflect the substance of
the transaction. For example, when the selling price of a product includes an identifiable amount
for subsequent servicing, that amount is deferred and recognised as revenue over the period
during which the service is performed. Conversely, the recognition criteria are applied to two or
more transactions together when they are linked in such a way that the commercial effect cannot
be understood without reference to the series of transactions as a whole. For example, an entity
may sell goods and, at the same time, enter into a separate agreement to repurchase the goods
at a later date, thus negating the substantive effect of the transaction; in such a case, the two
transactions are dealt with together.

2. Measurement of revenue
Revenue shall be measured at the fair value of the consideration received or receivable. Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The amount of revenue
arising on a transaction is usually determined by agreement between the entity and the buyer
or user of the asset. It is measured at the fair value of the consideration received or receivable
taking into account the amount of any trade discounts and volume rebates allowed by the entity.
3. Sale of goods
Revenue from the sale of goods shall be recognised when all the following conditions have been
satisfied: (a) the entity has transferred to the buyer the significant risks and rewards of
ownership of the goods; (b) the entity retains neither continuing managerial involvement to the
degree usually associated with ownership nor effective control over the goods sold; (c) the
amount of revenue can be measured reliably; (d) it is probable that the economic benefits
associated with the transaction will flow to the entity; and (e) the costs incurred or to be incurred
in respect of the transaction can be measured reliably.
4. Rendering of services
When the outcome of a transaction involving the rendering of services can be estimated reliably,
revenue associated with the transaction shall be recognised by reference to the stage of
completion of the transaction at the end of the reporting period. The outcome of a transaction
can be estimated reliably when all the following conditions are satisfied: (a) the amount of
revenue can be measured reliably; (b) it is probable that the economic benefits associated with
the transaction will flow to the entity; (c) the stage of completion of the transaction at the end of
the reporting period can be measured reliably; and (d) the costs incurred for the transaction and
the costs to complete the transaction can be measured reliably.
The recognition of revenue by reference to the stage of completion of a transaction is often
referred to as the percentage of completion method. Under this method, revenue is recognised
in the accounting periods in which the services are rendered. The recognition of revenue on this
basis provides useful information on the extent of service activity and performance during a
period.
When the outcome of the transaction involving the rendering of services cannot be estimated
reliably, revenue shall be recognised only to the extent of the expenses recognised that are
recoverable.
5. Interest and Royalties
Revenue arising from the use by others of entity assets yielding interest and royalties shall be
recognised when: (a) it is probable that the economic benefits associated with the transaction
will flow to the entity; and (b) the amount of the revenue can be measured reliably.

Revenue shall be recognised on the following bases: (a) interest shall be recognised using the
effective interest method as set out in Ind AS 109; (b) royalties shall be recognised on an accrual
basis in accordance with the substance of the relevant agreement.
6. Major Changes in Ind AS 18 vis--vis IAS 18
6.1 Resulting in Carve Out
As per IFRS: On the basis of principles of the IAS 18, IFRIC 15, Agreement for Construction of
Real Estate, prescribes that construction of real estate should be treated as sale of goods and
revenue should be recognised when the entity has transferred significant risks and rewards of
ownership and retained neither continuing managerial involvement nor effective control.
Carve out: IFRIC 15 has not been included in Ind AS 18 to scope out such agreements from
Ind AS 18. A separate guidance note on accounting for real estate developers (for Ind AS
compliant entities) has been issued by the ICAI to address the matter.
Reason: It was observed that requirement will lead to recognition of revenue in the financial
statements by real estate developers based on the completion method, i.e., only in the last year
of the completion of project. It was felt that in case the revenue for the whole project is
recognised in the last year of completion of project, it will not reflect the true performance of the
business of the real estate developer. Further, it was felt that since Ind AS 11 requires
recognition of revenue of all construction contracts by reference to stage of completion, it may
lead to inappropriate accounting in case of certain real estate development projects in case this
Ind AS is applied for all real estate development projects. Therefore, it was considered
appropriate that rather than making changes in Ind AS 11 or Ind AS 18, a separate Guidance
note (for Ind AS-compliant entities) should be issued in line with the Guidance note on
Accounting for Real Estate Transactions issued by the Institute of Chartered Accountants of
India (for entities on which AS are applicable).
6.2 Not Resulting in Carve Out
1. Recognition and Measurement of Interest: Paragraph 1A is inserted in Ind AS 18 which
states that recognition of interest is dealt in this standard whereas measurement of interest is
dealt in accordance with Ind AS 109, Financial Instruments.
2. Impairment of Contractual Right: Paragraph 1B is inserted in Ind AS 18, which
prescribes the impairment of any contractual right to receive cash or another financial asset
arising from this standard, shall be dealt in accordance with Ind AS 109, Financial Instruments.
7. Major Changes in Ind AS 18 vis--vis Notified AS 9
(i) Definition of Revenue: Definition of revenue given in Ind AS 18 is broad compared to
the definition of revenue given in existing AS 9 because it covers all economic benefits

The term IFRS includes not only the International Financial Reporting Standards (IFRSs) issued by
the IASB, it also includes the International Accounting Standards (IASs), IFRICs and SICs.

that arise in the ordinary course of activities of an entity which result in increases in equity,
other than increases relating to contributions from equity participants. On the other hand,
as per the existing AS 9, revenue is gross inflow of cash, receivables or other consideration
arising in the course of the ordinary activities of an enterprise from the sale of goods, from
the rendering of services, and from the use by others of enterprise resources yielding
interest, royalties and dividends.
(ii) Measurement of Revenue: Measurement of revenue is briefly covered in the definition of
revenue in the existing AS 9, while Ind AS 18 deals separately in detail with measurement
of revenue. As per existing AS 9, revenue is recognised at the nominal amount of
consideration receivable. Ind AS 18 requires the revenue to be measured at fair value of
the consideration received or receivable.
(iii) Barter Transactions: Ind AS 18 specifically deals with the exchange of goods and
services with goods and services of similar and dissimilar nature. In this regard specific
guidance is given regarding barter transactions involving advertising services. This aspect
is not dealt with in the existing AS 9.
(iv) Recognition of Separately Identifiable Components: Ind AS 18 provides guidance on
application of recognition criteria to the separately identifiable components of a single
transaction in order to reflect the substance of the transaction. Existing AS 9 does not
specifically deal with the same.
(v) Recognition of Interest: Existing AS 9 requires the recognition of revenue from interest
on time proportion basis. Ind AS 18 requires interest to be recognised using effective
interest rate method as set out in Ind AS 109, Financial Instruments.
(vi) Guidance Regarding Revenue Recognition in Specific Cases: Ind AS 18 specifically
provides guidance regarding revenue recognition in case the entity is under any obligation
to provide free or discounted goods or services or award credits to its customers due to
any customer loyalty programme. Existing AS 9 does not deal with this aspect.
(vii) Disclosure of Excise Duty: Existing AS 9 specifically deals with disclosure of excise duty
as a deduction from revenue from sales transactions. Ind AS 18 does not specifically deal
with the same.
(viii) Disclosure Requirements: Disclosure requirements given in the Ind AS 18 are more
detailed as compared to existing AS 9.

Appendix III
Guidance Note on Accounting for Expenditure on Corporate

Social Responsibility Activities.
The objective of this Guidance Note is to provide guidance on recognition, measurement,
presentation and disclosure of expenditure on activities relating to corporate social
responsibility.
The Guidance Note does not deal with identification of activities that constitute CSR activities
but only provides guidance on accounting for expenditure on CSR activities in line with the
requirements of the generally accepted accounting principles including the applicable
Accounting Standards.
The Act clearly lay down that the expenditure on CSR activities is to be disclosed only in the
Boards Report in accordance with the Rules made thereunder. In view of this, no provision for
the amount which is not spent, i.e., any shortfall in the amount that was expected to be spent
as per the provisions of the Act on CSR activities and the amount actually spent at the end of a
reporting period, may be made in the financial statements. The proviso to section 135 (5) of the
Act, makes it clear that if the specified amount is not spent by the company during the year, the
Directors Report should disclose the reasons for not spending the amount.
However, if a company has already undertaken certain CSR activity for which a liability has
been incurred by entering into a contractual obligation, then in accordance with the generally
accepted principles of accounting, a provision for the amount representing the extent to which
the CSR activity was completed during the year, needs to be recognized in the financial
statements.
Where a company spends more than that required under law, a question arises as to whether
the excess amount spent can be carried forward to be adjusted against amounts to be spent
on CSR activities in future period. Since 2% of average net profits of immediately preceding
three years is the minimum amount which is required to be spent under section 135 (5) of the
Act, the excess amount cannot be carried forward for set off against the CSR expenditure
required to be spent in future.
A company may decide to undertake its CSR activities approved by the CSR Committee with a
view to discharge its CSR obligation as arising under
section 135 of the Act in the following three ways:
(a) making a contribution to the funds as specified in Schedule VII to the Act; or
(b) through a registered trust or a registered society or a company established under section
8 of the Act (or section 25 of the Companies Act, 1956) by the company, either singly or
along with its holding or subsidiary or associate company or along with any other company
or holding or subsidiary or associate company of such other company, or otherwise; or

(c) in any other way in accordance with the Companies (Corporate Social Responsibility
Policy) Rules, 2014, e.g. on its own.
In case a contribution is made to a fund specified in Schedule VII to the Act, the same would be
treated as an expense for the year and charged to the statement of profit and loss. In case the
amount is spent in the manner as specified in paragraph10 (b) above the same will also be
treated as expense for the year by charging off to the statement of profit and loss. The
accounting for expenditure incurred by the company otherwise e.g. on its own would be
accounted for in accordance with the principles of accounting as explained hereinafter.
In case the expenditure incurred by the company is of such nature which may give rise to an
asset, a question may arise as to whether such an asset should be recognised by the company
in its balance sheet. In this context, it would be relevant to note the definition of the term asset.
Invariably future economic benefits from a CSR asset would not flow to the company as any
surplus from CSR cannot be included by the company in business profits in view of Rule 6(2) of
the Companies (Corporate Social Responsibility Policy) Rules, 2014.
In some cases, a company may supply goods manufactured by it or render services as CSR
activities. In such cases, the expenditure incurred should be recognised when the control on the
goods manufactured by it is transferred or the allowable services are rendered by the
employees. The goods manufactured by the company should be valued in accordance with the
principles prescribed in Accounting Standard (AS) 2, Valuation of Inventories. The services
rendered should be measured at cost. Indirect taxes (like excise duty, service tax, VAT or other
applicable taxes) on the goods and services so contributed will also form part of the CSR
expenditure.
Where a company receives a grant from others for carrying out CSR activities, the CSR
expenditure should be measured net of the grant.
Rule 6 (2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, requires that
the surplus arising out of the CSR projects or programs or activities shall not form part of the
business profit of a company any surplus arising out of CSR project or programme or activities
shall be recognised in the statement of profit and loss and since this surplus cannot be a part
of business profits of the company, the same should immediately be recognised as liability for
CSR expenditure in the balance sheet and recognised as a charge to the statement of profit and
loss. Accordingly, such surplus would not form part of the minimum 2% of the average net
profits of the company made during the three immediately preceding financial years in
pursuance of its Corporate Social Responsibility Policy.
It is recommended that all expenditure on CSR activities, that qualify to be recognised as
expense in accordance with paragraphs 10-14 above should be recognised as a separate line
item as CSR expenditure in the statement of profit and loss. Further, the relevant note should
disclose the break-up of various heads of expenses included in the line item CSR expenditure.

Guidance Note on Accounting for Derivative Contracts

The objective of this Guidance Note is to provide guidance on recognition, measurement,
presentation and disclosure for derivative contracts so as to bring uniformity in their accounting
and presentation in the financial statements. This Guidance Note also provides accounting
treatment for such derivatives where the hedged item is covered under notified Accounting
Standards, e.g., a commodity, an investment, etc., because except AS 11, no other notified
Accounting Standard prescribes any accounting treatment for derivative accounting. This
Guidance Note, however, does not cover foreign exchange forward contracts which are within
the scope of AS 11. This Guidance Note is an interim measure to provide recommendatory
guidance on accounting for derivative contracts and hedging activities considering the lack of
mandatory guidance in this regard with a view to bring about uniformity of practice in accounting
for derivative contracts by various entities.
This Guidance Note covers all derivative contracts that are not covered by an existing notified
Accounting Standard. Hence, it does not apply to the following:
(i) Foreign exchange forward contracts (or other financial instruments which in substance are
forward contracts covered) by AS 11.
(ii) Derivatives that are covered by regulations specific to a sector or specified set of entities.
The accounting for derivatives covered by this Guidance Note is based on the following key
principles:
(i) All derivative contracts should be recognised on the balance sheet and measured at fair
value.
(ii) If any entity decides not to use hedge accounting as described in this Guidance Note, it
should account for its derivatives at fair value with changes in fair value being recognised
in the statement of profit and loss.
(iii) If an entity decides to apply hedge accounting as described in this Guidance Note, it should
be able to clearly identify its risk management objective, the risk that it is hedging, how it will
measure the derivative instrument if its risk management objective is being met and
document this adequately at the inception of the hedge relationship and on an ongoing basis.
(iv) An entity may decide to use hedge accounting for certain derivative contracts and for
derivatives not included as part of hedge accounting, it will apply the principles at (i) and
(ii) above.
(v) Adequate disclosures of accounting policies, risk management objectives and hedging
activities should be made in its financial statements
Hedge accounting may be required due to accounting mismatches in:
Measurement
Recognition

Types of hedge accounting

This Guidance Note recognises the following three types of hedging;
the fair value hedge accounting model is applied when hedging the risk of a fair value
change of assets and liabilities already recognised in the balance sheet, or a firm
commitment that is not yet recognised.
the cash flow hedge accounting model is applied when hedging the risk of changes in
highly probable future cash flows or a firm commitment in a foreign currency.
the hedge of a net investment in a foreign operation.
Derivative assets and liabilities recognised on the balance sheet at fair value should be
presented as current and non-current.
Guidance Note on Accounting for Depreciation in Companies

in the context of Schedule II to the Companies Act, 2013
This Guidance Note is issued with the objective to provide guidance on certain significant issues
that may arise from the practical application of Schedule II with a view to establish consistent
practice with regard to the accounting for depreciation.
This Guidance Note includes relevant provisions of Schedule II and provides guidance on
implementing the requirements of Schedule II.
Schedule II to the Companies Act, 2013, specifies useful lives for the purpose of computation
of depreciation. The said Schedule II was further amended by the Ministry of Corporate Affairs
(MCA) through its notifications G.S.R. 237(E) dated March 31, 2014 and G.S.R. 627(E) dated
August 29, 2014, respectively. As compared to Schedule XIV to the Companies Act, 1956,
Schedule II, instead of specifying rates of depreciation for various assets, specifies that
depreciation should be provided on the basis of useful life of an asset. While Schedule XIV was
prescriptive in nature as it specified the minimum rate of depreciation, Schedule II provides
indicative useful lives for various assets. As a consequence, the companies are in a position to
charge depreciation based on the useful life of an asset supported by technical advice, even
though such lives are higher or lower than those specified in the said schedule. In view of this,
depreciation charged as per the useful life is true commercial depreciation bringing the financial
statements prepared accordingly closer to those prepared in accordance with international
standards.
the useful lives as given under Part C of Schedule II for various types of assets are indicative
only and are not minimum or maximum. Where the useful lives of various specific assets are
the same as those under Schedule II, the company should use these useful lives. In case the
useful life of an asset as estimated by the company, supported by the technical advice, external

or internal, differs, i.e., higher or lower from the indicative useful life given under Schedule II,
the former should be applied by the company for providing depreciation. The disclosures in this
regard should be made as described later in this Guidance Note. The process of determination
of useful life is explained in the chart below. A company has to determine the useful life at the
beginning of the year for all fixed assets, existing as at the end of the immediately preceding
period and for newly acquired assets, as and when acquired. All fixed assets existing at the
beginning of the year should be classified into assets for which no extra shift depreciation is
applicable which would include continuous process plant (CPP) and assets for which extra shift
depreciation applies. Of the assets for which extra shift depreciation applies, assets which are
going to be used on single shift, double shift or triple shift are segregated. This segregation is
required as the extra shift depreciation is applicable only to those assets whose useful life is
determined on single shift basis. After segregation, the remaining useful life of the asset is
estimated. A company recognises depreciation expense based on the useful life estimated by
the management. Where the useful life estimated by the management is different from that
specified by Schedule II, the same is disclosed in notes.
Illustration
A Limited is a company incorporated under the Companies Act, 1956, engaged in the business of
manufacturing of toys. A Limited purchased a unit of machinery costing ` 60 lakhs as on April 01, 2014.
As per Schedule II the general useful life of the assets is15 years. However, as per A Ltd.s estimation,
the useful life of the asset is 20 years supported by the technical advice.
Should the company use the useful life as 15 years or 20 years?
Solution
In this case, keeping in view the requirements under Schedule II, A Ltd. should depreciate the machinery
over its useful life of 20 years as determined by the company and not over 15 years as indicated in
Schedule II. A limited should also provide disclosures in this regard as recommended later in this
Guidance Note in the notes to accounts to justify the reason for difference between the indicative use life
and As estimated useful life.
Illustration
B Limited had considered the minimum rates of depreciation mentioned in Schedule XIV for depreciating
all its fixed assets till March 31, 2014. Based on the rates mentioned for SLM and WDV in Schedule XIV,
B Limited had derived the useful lives for the assets. Schedule II of the Companies Act, 2013 is now
applicable to B Limited w.e.f. April 1, 2014.
Whether B Limited needs to follow the useful lives mentioned in the Schedule II or derived useful lives
considered till March 31, 2013 can be considered?
Solution
W.e.f. April 1, 2014, B limited should estimate the remaining useful lives of its assets based on the
definition of useful life in Schedule II and the factors specified in AS 6 for recognising depreciation in the

statement of profit and loss. There is no relevance of the derived useful life as per Schedule XIV.
However, if B Limited estimates useful lives different from those specified in Schedule II, it should
disclose such differences in the financial statements and provide justification in this behalf duly supported
by technical advice.
Note 8 to Schedule II defines the expression Continues Process Plant as:

Continuous process plant means a plant which is required and designed to operate for twenty-
four hours a day.
The words required and designed to operate twenty-four hours a day are very significant and
should be interpreted with reference to the inherent technical nature of the plant, i.e., the
technical design of a CPP is such that there is a requirement to run it continuously for twenty-
four hours a day. If it is not so run, there are significant shut-down and/or start-up costs. If such
a plant is shut-down, there may be significant spoilage of materials-in-process/ some damage
to the plant itself/significant energy loss. It is, however, possible that due to various reasons,
e.g., lack of demand, maintenance etc., such a plant may be shut down for some time. The
shut-down does not change the inherent technical nature of the plant.
CPP is distinct from the repetitive process plant or assembly-line type plants. These plants are
not CPP since such plants do not involve significant shut-down and/or start-up costs and are
not technically required and designed to operate twenty-four hours a day, e.g., an automobile
manufacturing plant.
It is noted that extra shift depreciation does not apply to CPP and the assets which have been
marked as No Extra Shift Depreciation (NESD) under Schedule II. The concept of extra shift
depreciation applies only to those assets for which the useful life has been estimated on single
shift basis at the beginning of the year
Where a company, which estimated the useful life of an asset on single shift basis at the
beginning of the year, used the asset on double or triple shifts during the year, the depreciation
expense should be increased by 50% or 100% as the case may be for that period. Further, for
such assets, the company at the beginning of the next year should determine whether the asset
used in extra shift during the past year was on sporadic basis and is expected to be used on
sporadic basis in future also. In such a case, the useful life to be on single shift basis and if in
future the asset is used on double or triple shift then as in the past, the depreciation expense
for the double or triple shift should be increased by 50% or 100% as the case may be for the
period of use. In case the company estimates that the use of the asset for extra shift would not
be on sporadic basis i.e. the extra shift working for the asset would be on regular or continuous
basis, it should reassess its useful life considering its use on extra shift basis. The reassessed
useful life should then be used for the purpose of charging depreciation expense henceforth.

a result of application of Schedule II, a company may use UOP method, where appropriate,
keeping in view the various factors mentioned in paragraph 12 of AS 6. UOP method is generally
considered appropriate where the number of units that can be produced or serviced from the
use of the asset is the major limiting factor for the use of the asset rather than the time.
with the introduction of UOP method in Schedule II, a company may change from SLM or WDV
method to UOP method. In such cases, in accordance with AS 6, depreciation on the underlying
asset should be calculated retrospectively using the UOP method from the date the asset came
into use to the company with adjustment of any surplus or deficiency arising from change in
method to the statement of profit and loss as such change is required by the statute. However,
as a first time application of Schedule II, if a company changes its method of depreciation from
WDV to SLM or vice versa, the same cannot be justified as required by law as both the methods
were allowed under Schedule XIV and AS 6. In accordance with AS 6, a shift from WDV to SLM
or vice versa can only be applied by the company if it is considered that the change would result
in a more appropriate preparation or presentation of the financial statements of the company.
In such a case also, any surplus or deficiency arising from change in method should be adjusted
to the statement of profit and loss in accordance with AS 6. It may also be noted that in case of
change in method of depreciation, transitional provisions given under Note 7 (b) of Schedule II
will not apply.
Illustration:
A Limited is a company incorporated under the Companies Act and engaged in the business of oil
exploration. Keeping in view the requirement in Schedule XIV it was depreciating its oil and gas assets
on SLM basis. In the financial year 2014-15, when A applies Schedule II it decides to depreciate the said
assets by following the UOP method.
How should change in method be accounted for?
Solution
In this case, in accordance with AS 6, A Limited should calculate depreciation on all such assets following
the UOP method since the assets came into existence and recognise any deficiency/gain in the statement
of profit and loss for the period ending on March 31, 2015.
Useful life specified in Part C of the Schedule is for whole of the asset. Where cost of a part of
the asset is significant to total cost of the asset and useful life of that part is different from the
useful life of the remaining asset, useful life of that significant part shall be determined
separately. It is commonly known as component accounting. Companies will need to identify
and depreciate significant components with different useful lives separately.
Under component accounting, companies will capitalise these costs as a separate component
of the asset and decapitalise the carrying amount of previously recognised component. A
company is required to apply component accounting (if appropriate) for all depreciable fixed

assets (existing or newly acquired) as at 1 April 2014 if a company opts to follow it voluntarily
and as at 1 April, 2015 mandatorily. However, if the carrying amount of any asset is lower than
or equal to the estimated residual value of the asset(s), company is not required to apply
component accounting for such asset(s).
The company must split the fixed asset into various identifiable parts to the extent possible. The
identified parts should be grouped together if they have the same or similar useful life for the
purpose of separate depreciation. Insignificant parts may be combined together in the remainder
of the asset or with the principal asset.
It may be noted that Schedule II does not prescribe any such requirement to provide
depreciation at the rate of hundred percent. Therefore, an issue may arise whether the earlier
requirement of providing hundred percent depreciation on assets with value less than rupees
five thousand can still be followed or not.
As the life of the asset is a matter of estimation, the materiality of impact of such charge should
be considered with reference to the cost of asset. The size of the company will also be a factor
to be considered for such policy. Accordingly, a company may have a policy to fully depreciate
assets upto certain threshold limits considering materiality aspect in the year of acquisition.
The company may group additions and disposals in appropriate time period(s), e.g., 15 days, a
month, a quarter etc., for the purpose of charging pro rata depreciation in respect of additions
and disposals of its assets keeping in view the materiality of the amounts involved.
The use of different methods for similar assets at different geographical locations is not justified.
PART II : QUESTIONS AND ANSWERS

QUESTIONS
AS 2
1. (a) Suraj Ltd. sells beer to customers. Some of the customers consume the beer in the
bars run by Suraj Limited. While leaving the bars, the consumers leave the empty
bottles in the bars and the company takes possession of these empty bottles. The
company has laid down a detailed internal record procedure for accounting for these
empty bottles which are sold by the company by calling for tenders. Keeping this in
view:
(i) Decide whether the inventory of empty bottles is an asset of the company;
(ii) If so, whether the inventory of empty bottles existing as on the date of Balance
Sheet is to be considered as inventories of the company and valued as per
AS 2 or to be treated as scrap and shown at realizable value with corresponding
credit to Other Income?

AS 12
(b) Hygiene Ltd. had received a grant of ` 50 lakh in 2008 from a State Government
towards installation of pollution control machinery on fulfilment of certain conditions.
The company, however, failed to comply with the said conditions and consequently
was required to refund the said amount in 2016.
The company debited the said amount to its machinery in 2016 on payment of the
same. It also reworked the depreciation for the said machinery from the date of its
purchase and passed necessary adjusting entries in the year 2016 to incorporate the
retrospective impact of the same. State whether the treatment done by the company
is correct or not.
AS 5
2. (a) During the course of the last three years, a company owning and operating
Helicopters lost four Helicopters. The companys accountant felt that after the crash,
the maintenance provision created in respect of the respective helicopters was no
longer required, and proposed to write it back to the Profit and Loss account as a
prior period item.
Is the companys proposed accounting treatment correct? Discuss.
AS 24
(b) A Washing articles producing company provides the following information:
Washing Bar Washing Powder
January, 2016 September, 2016 per month 2,00,000 2,00,000
October, 2016 December, 2016 per month 1,00,000 3,00,000
January, 2017- March, 2017 per month 0 4,00,000
The company has enforced a gradual change in product-line on the basis of an overall
plan. The Board of Directors of the company has passed a resolution in March, 2016
to this effect. The company follows calendar year as its accounting year. Should this
be treated as a discontinuing operation? Give reasons in support of your answer.
AS 9
3. (a) A infrastructure company has constructed a mall and entered into agreement with
tenants towards license fee (monthly rental) and variable license fee, a percentage
on the turnover of the tenant (on an annual basis). Chief Finance Officer wants to
account/recognize license fee as income for 12 months during current year under
audit and variable license fee as income during next year, since invoice is raised in
the subsequent year. Comment whether the treatment desired by the CFO is correct
or not.

AS 16
(b) In May, 2016, Capacity Ltd. took a bank loan to be used specifically for the
construction of a new factory building. The construction was completed in January,
2017 and the building was put to its use immediately thereafter. Interest on the actual
amount used for construction of the building till its completion was ` 18 lakhs,
whereas the total interest payable to the bank on the loan for the period till
31st March, 2017 amounted to ` 25 lakhs. Can ` 25 lakhs be treated as part of the
cost of factory building and thus be capitalized on the plea that the loan was
specifically taken for the construction of factory building?
AS 25
4. (a) An enterprise reports quarterly, estimates an annual income of ` 10 lakhs. Assume
tax rates on 1st ` 5,00,000 at 30% and on the balance income at 40%. The estimated
quarterly income are ` 75,000, ` 2,50,000, ` 3,75,000 and ` 3,00,000.
Calculate the tax expense to be recognized in each quarter.
AS 13 and AS 23
(b) Full Ltd. acquired 30% of Part Ltd. shares for ` 2,00,000 on 01-06-2016. By such an
acquisition, Full Ltd. can exercise significant influence over Part Ltd. During the
financial year ending on 31-03-2016, Part earned profits ` 80,000 and declared a
dividend of ` 50,000 on 12-08-2016. Part reported earnings of ` 3,00,000 for the
financial year ending on 31-03-2017 and declared dividends of ` 60,000 on
12-06-2017.
Calculate the carrying amount of investment in:
(i) Separate financial statements of Full Ltd. as on 31-03-2017;
(ii) Consolidated financial statements of Full Ltd.; as on 31-03-2017;
(iii) What will be the carrying amount as on 30-06-2017 in consolidated financial
statements?
AS 9
5. (a) Milk Ltd. entered into an agreement with Curd Ltd. for sale of goods of ` 8 lakhs at a
profit of 20% on cost. The sale transaction took place on 1st February, 2017. On the
same day Curd Ltd. entered into another agreement with Milk Ltd. to resell the same
goods at ` 10.80 lakhs on 1st August, 2017. State the treatment of this transaction
in the financial statements of Milk Ltd. as on 31.03.2017. The pre-determined re-
selling price covers the holding cost of Curd Ltd. Give the Journal Entries as on
31.03.2017 in the books of Milk Ltd.
AS 15
(b) The following data apply to X Ltd. defined benefit pension plan for the year ended
31.03.2017, calculate the actual return on plan assets:

Benefits paid 2,00,000

Employer contribution 2,80,000
Fair market value of plan assets on 31.03.2017 11,40,000
Fair market value of plan assets as on 31.03.2016 8,00,000
AS 26
6. (a) Research Ltd. is developing a new production process. During the financial year
ending 31st March, 2016, the total expenditure incurred was ` 50 lakhs. This process
met the criteria for recognition as an intangible asset on 1st December, 2015.
Expenditure incurred till this date was ` 22 lakhs. Further expenditure incurred on
the process for the financial year ending 31 st March, 2017 was ` 80 lakhs. As at
31st March, 2017, the recoverable amount of know-how embodied in the process is
estimated to be ` 72 lakhs. This includes estimates of future cash outflows as well
as inflows.
You are required to calculate:
(i) Amount to be charged to Profit and Loss A/c for the year ending
31st March, 2016 and carrying value of intangible as on that date.
(ii) Amount to be charged to Profit and Loss A/c and carrying value of intangible as
on 31st March, 2017.
Ignore depreciation.
AS 19
(b) ABC Ltd. has initiated a lease for three years in respect of an equipment costing
` 1,50,000 with expected useful life of 4 years. The asset would revert to ABC Limited
under the lease agreement. The other information available in respect of lease
agreement is:
(i) The unguaranteed residual value of the equipment after the expiry of the lease
term is estimated at ` 20,000.
(ii) The implicit rate of interest is 10%.
(iii) The annual payments have been determined in such a way that the present
value of the lease payment plus the residual value is equal to the cost of asset.
Ascertain in the hands of ABC Ltd.
(i) The annual lease payment.
(ii) The unearned finance income.
(iii) The segregation of finance income, and also,
(iv) Show how necessary items will appear in its profit and loss account and balance
sheet for the various years.

AS 20
7. (a) Superb Ltd. supplied the following information. You are required to compute the basic
earning per share:
(Accounting year 1.1.2016 31.12.2016)
Net Profit : Year 2016 : ` 20,00,000
: Year 2017 : ` 30,00,000
No. of shares outstanding prior to Right : 10,00,000 shares
Issue
Right Issue : One new share for each four
outstanding i.e., 2,50,000 shares.
Right Issue price ` 20
Last date of exercise rights
31.3.2017.
Fair value of one Equity share
immediately prior to exercise of rights on : ` 25
31.3.2017
AS 17
(b) Prepare a segmental report for publication in XYZ Ltd. from the following details of
the companys three divisions and the head office:
` (000)
A Division
Sales to B Division 4,575
Other Domestic Sales 90
Export Sales 6,135
10,800
B Division
Sales to C Division 45
Export Sales to Rwanda 300
345
C Division
Export Sales to Maldives 270

Particulars Head Office A Division B Division C Division

` (000) ` (000) ` (000) ` (000)
Pre-tax operating result 240 30 (12)
Head office cost reallocated 72 36 36
Interest costs 6 8 2
Fixed assets 75 300 60 180
Net current assets 72 180 60 135
Long-term liabilities 57 30 15 180
AS 22
8. (a) The following particulars are stated in the Balance Sheet of Profit Ltd. as on
31.03.2016:
(` in lakh)
Deferred Tax Liability (Cr.) 20.00
Deferred Tax Assets (Dr.) 10.00
The following transactions were reported during the year 2016-2017:
(i) Tax Rate 50%
(ii) Depreciation As per Books 50.00
Depreciation for Tax purposes 30.00
There were no additions to Fixed Assets during the year.
(iii) Items disallowed in 2015-2016 and allowed for Tax purposes in 10.00
2016-2017
(iv) Interest to Financial Institutions accounted in the Books on accrual
basis, but actual payment was made on 30.09.2017 20.00
(v) Donations to Private Trusts made in 2016-2017 10.00
(vi) Share issue expenses allowed under 35(D) of the I.T. Act, 1961
for the year 2016-2017 (1/10th of ` 50.00 lakhs incurred in 2012- 5.00
2013)
(vii) Repairs to Plant and Machinery ` 100.00 lakhs was spread over the period
2016-2017 and 2017-2018 equally in the books. However, the entire
expenditure was allowed for Income-tax purposes.

Indicate clearly the impact of above items in terms of Deferred Tax liability/Deferred
Tax Assets and the balances of Deferred Tax Liability/Deferred Tax Asset as on
31.03.2017.
Guidance Note on Schedule III to the Companies Act, 2013
(b) H Ltd. engaged in the business of manufacturing lotus wine. The process of
manufacturing this wine takes around 18 months. Due to this reason H Ltd. has
prepared its financial statements considering its operating cycle as 18 months and
accordingly classified the raw material purchased and held in stock for less than 18
months as current asset. Comment on the accuracy of the decision and the treatment
of asset by H Ltd. as per Schedule III to the Companies Act, 2013.
Ind AS Carve outs in Ind AS from IFRS
9. (a) Explain the carve out in Ind AS 17 Leases from IAS 17 Leases with the reason
thereof.
Differences in Ind AS vis-a-vis AS
(b) Explain the major differences in Ind AS 12 Income Taxes and AS 22 Accounting for
Taxes.
Corporate Restructuring
10. Pulses Ltd. and Cereals Ltd. decided to amalgamate their business with a view to a public
share issue. A holding company, Mix Ltd., is to be incorporated on 1st May 2017 with all
authorised capital of ` 60,000,000 in ` 10 ordinary shares. The company will acquire the
entire ordinary share capital of Pulses Ltd. and of Cereals Ltd. in exchange for an issue of
its own shares.
The consideration for the acquisition is to be ascertained by multiplying the estimated
profits available to the ordinary shareholders by agreed price earnings ratio. The following
relevant figures are given:
Pulses Ltd. Cereals
Ltd.
` `
Issued share capital
Ordinary shares of ` 10 each 30,00,000 12,00,000
6% Cumulative Preference shares of ` 100 each 10,00,000
5% Debentures, redeemable in 2018 8,00,000
Estimated annual maintainable profits, before deduction
of debenture interest & taxation 6,00,000 2,40,000
Price / earnings ratio 15 10

The shares in the holding company are to be issued to members of the subsidiaries on 1st
June 2017, at a premium of ` 2.50 a share and thereafter these shares will be marketable
on the Stock Exchange.
It is anticipated that the merger will achieve significant economics but will necessitate
additional working capital. Accordingly, it is planned that on 31st December 2017, Grains
Ltd. will make a further issue of 60,000 ordinary shares to the public for cash at the
premium of ` 3.75 a share. These shares will not rank for dividends until 31st December
2017.
In the period ending 31st December 2017, bank overdraft facilities will provide funds for
the payment of management etc. expenses estimated at ` 6,000.
It is further assumed that interim dividends on ordinary shares, relating to the period from
1st June to 31st December 2017 will be paid on 31st December 2017 by Grains Ltd. at 3
%, by Pulses Ltd. at 5% and by Cereals Ltd. at 2%.
You are required to project, as on 31st December 2017 for Grains Ltd., (a) the Balance
Sheet as it would appear immediately after fully subscribed share issue, and (b) the Profit
and Loss Account for the Period ending 31st December 2017.
Assume the rate of corporation tax to be 40%. You can make any other assumption you
consider relevant.
Consolidated Financial Statements
11. Following are the summarized Balance Sheets of Mumbai Limited, Delhi Limited, Amritsar
Limited and Kanpur Limited as at 31st March, 2017:
Liabilities Mumbai Delhi Amritsar Kanpur
Ltd. Ltd. Ltd. Ltd.
Share Capital (` 100 face value) 50,00,000 40,00,000 20,00,000 60,00,000
General Reserve 20,00,000 4,00,000 2,50,000 10,00,000
Profit & Loss Account 10,00,000 4,00,000 2,50,000 3,20,000
Trade payables 3,00,000 1,00,000 50,000 80,000
83,00,000 49,00,000 25,50,000 74,00,000
Assets
Investments:
30,000 shares in Delhi Ltd. 35,00,000
10,000 shares in Amritsar Ltd. 11,00,000
5,000 shares in Amritsar Ltd. 5,00,000
Shares in Kanpur Ltd. @ ` 120 36,00,000 18,00,000 6,00,000
Fixed Assets 20,00,000 15,00,000 70,00,000
Current Assets 1,00,000 6,00,000 4,50,000 4,00,000
83,00,000 49,00,000 25,50,000 74,00,000

Balance in General Reserve Account and Profit & Loss Account, when shares were
purchased in different companies were:
Mumbai Delhi Amritsar Kanpur
Ltd. Ltd. Ltd. Ltd.
General Reserve Account 10,00,000 2,00,000 1,00,000 6,00,000
Profit & Loss Account 6,00,000 2,00,000 50,000 60,000
Prepare the Consolidated Balance Sheet of the group as at 31st March, 2017 (Calculations
may be rounded off to the nearest rupee).
Financial Instruments
12. On 1st April, 2017, Alpha Ltd. issued ` 30,00,000, 6% convertible debentures of face value
of ` 100 per debenture at par. The debentures are redeemable at a premium of 10% on
31.03.2021 or these may be converted into ordinary shares at the option of the holder, the
interest rate for equivalent debentures without conversion rights would have been 10%.
Being compound nancial instrument, you are required to separate equity and debt portion
as on 01.04.2017.
Share Based Payments
13. PQ Ltd. grants 100 stock options to each of its 1,000 employees on 1-4-2015, conditional
upon the employee remaining in the company for 2 years. The fair value of the option is
` 18 on the grant date and the exercise price is ` 55 per share. The other information is
given as under:
(i) The no. of employees expected to satisfy service condition are 930 in the 1 st year and
850 in the 2nd year.
(ii) 40 employees left the company in the 1st year of service and 880 employees have
actually completed 2 year vesting period.
(iii) The profit of the enterprise before amortization of the compensation cost on account
of ESOP is as follows:
(A) ` 18,50,000
(B) ` 22,00,000
(iv) The fair value of share for these years was ` 80 and ` 88 respectively.
(v) The company has 6 lakhs shares of ` 10 each outstanding at the end of both years.
Compute basic and diluted EPS for both the years (ignore the tax impacts).

Mutual Fund
14. An investor purchased 300 units of a Mutual Fund at ` 12.25 per unit on 31st December,
2016. As on 31st December, 2017 he has received ` 1.25 as dividend and ` 1.00 as
capital gains distribution per unit.
Required :
(i) The return on the investment if the NAV as on 31 st December, 2017 is ` 13.00.
(ii) The return on the investment as on 31 st December, 2017 if all dividends and capital
gains distributions are reinvested into additional units of the fund at ` 12.50 per unit.
Non-Banking Finance Companies
15. Peoples Financiers Ltd. is an NBFC providing Hire Purchase Solutions for acquiring
consumer durables. The following information is extracted from its books for the year
ended 31st March, 2017:
Interest Overdue but recognized in
Profit & loss Net Book Value of
Asset Funded
Assets outstanding
Period Overdue Interest Amount
(` in crore) (` in crore)
LCD Televisions Upto 12 months 480.00 20,123.00
Washing Machines For 24 months 102.00 2,410.00
Refrigerators For 30 months 50.50 1,280.00
Air Conditioners For 45 months 26.75 647.00
You are required to calculate the amount of provision to be made.
Valuation of Goodwill
16. On the basis of the following information, calculate the value of goodwill of Price Ltd. at
three years purchase of super profits, if any, earned by the company in the previous four
completed accounting years.
Summarised Balance Sheet of Price Ltd. as at 31st March, 2017
Liabilities ` in lakhs Assets ` in lakhs
Share Capital: Land and Buildings 1,850
Authorised 7,500 Machinery 3,760
Issued and Subscribed Furniture and Fixtures 1,015
5 crore equity shares of ` 10 Patents and Trade Marks 32
each, fully paid up 5,000 9% Non-trading Investments 600

Capital Reserve 260 Inventory 873

General Reserve 2,983 Trade receivables 614
Surplus i.e. credit balance of Cash in hand and at Bank 546
Profit and Loss (appropriation) A/c 457
Trade payables 568
Provision for Taxation (net) 22
9,290 9,290
The profits before tax of the four years have been as follows:
Year ended 31st March Profit before tax in lakhs of Rupees
2013 3,190
2014 2,500
2015 3,108
2016 2,900
The rate of income tax for the accounting year 2012-2013 was 40%. Thereafter it has been
38% for all the years so far. But for the accounting year 2016-2017 it will be 35%.
In the accounting year 2012-2013, the company earned an extraordinary income of
` 1 crore due to a special foreign contract. In August, 2013 there was an earthquake due
to which the company lost property worth ` 50 lakhs and the insurance policy did not cover
the loss due to earthquake or riots.
9% Non-trading investments appearing in the above mentioned Balance Sheet were
purchased at par by the company on 1st April, 2014.
The normal rate of return for the industry in which the company is engaged is 20%. Also
note that the companys shareholders, in their general meeting have passed a resolution
sanctioning the directors an additional remuneration of ` 50 lakhs every year beginning
from the accounting year 2016-2017.
Valuation of Shares
17. The following is the Balance Sheet of Force Ltd. as on 31st March 2017:
Liabilities ` Assets `
3,00,000 Equity Shares of Building 20,00,000
` 10 each fully paid 30,00,000 Plant & Machinery 22,00,000
12.5% Redeemable Furniture 10,00,000
preference shares of ` 100
Investments 16,00,000
each fully paid
20,00,000 Inventory 12,00,000

General Reserve 11,00,000 Trade Receivables 20,00,000

Profit & Loss A/c 3,00,000 Bank Balance 4,00,000
Secured Loan 10,00,000
Trade Payables 30,00,000
1,04,00,000 1,04,00,000
Additional Information:
(i) Fixed assets are worth 20% more than book value. Inventory is overvalued by
` 1,00,000. Trade Receivables are to be reduced by ` 40,000. Trade investments,
which constitute 10% of the total investment are to be valued at 10% below cost.
(ii) Trade investments were purchased on 1.4.2016. 50% of non-trade investments were
purchased on 1.4.2015 and the rest on 1.4.2016. Non-trade investments yielded 15%
return on cost.
(iii) In 2015-2016, Furniture with a book value of ` 1,00,000 was sold for ` 50,000. This
loss should be treated as non-recurring or extraordinary item for the purpose of
calculating adjusted average profit.
(iv) In 2014-2015, new machinery costing ` 2,00,000 was purchased, but wrongly
charged to revenue. This amount should be adjusted taking depreciation at 10% on
reducing value method.
(v) Return on capital employed is 20% in similar business.
(vi) Goodwill is to be valued at two years purchase of super profits based on simple
average profits of last four years.
Profit of last four years are as under:
Year Amount (`)
2013-2014 13,00,000
2014-2015 14,00,000
2015-2016 16,00,000
2016-2017 18,00,000
(vii) It is assumed that preference dividend has been paid till date.
(viii) Depreciation on the overall increased value of assets (worth 20% more than book
value) need not be considered. Depreciation on the additional value of only plant and
machinery to be considered taking depreciation at 10% on reducing value method
while calculating average adjusted profit.
Find out the intrinsic value of the equity share. Ignore income tax and dividend tax.

Value Added Statement

18. Wow Ltd. has been preparing Value Added Statements for the past five years. The Human
Resource Manager of the company has suggested introducing a value added incentive
scheme to motivate the employees for their better performance. To introduce the scheme,
it is proposed that the best index performance (favourable to employer) i.e. Employee
Costs to Added Value for the last five years, will be used as the target index for future
calculations of the bonus to be paid.
After the target index is determined, any actual improvement in the index will be rewarded.
The employer and the employee will be sharing any such improvement in the ratio of 1:2.
The bonus is given at the end of the year, after the profit for the year is determined.
The following information is available for the last 5 years.
Value Added Statement for 5 years
` in thousands
Particulars For the year ended 31st March
2012 2013 2014 2015 2016
Sales 5,600 7,600 9,200 10,400 12,000
Less: Bought in goods & services (2,560) (4,000) (5,000) (5,600) (6,400)
Added Value 3,040 3,600 4,200 4,800 5,600
Employee Costs 1,300 1,520 1,680 1,968 2,240
Dividend 200 300 400 480 600
Taxes 640 760 840 1000 1,120
Depreciation 520 620 720 880 1,120
Debenture Interest 80 80 80 80 80
Retaining Earnings 300 320 480 392 440
Added Value 3,040 3,600 4,200 4,800 5,600
Summarised Profit and Loss Account for the year ended on 31st March, 2017
(` in thousand)
Particulars
Amount
Income
Sales less returns 13,600
Dividends and Interest 500

Miscellaneous Income 500

(A) 14,600
Expenditure
Production and Operational Expenses:
Cost of Materials 5,000
Wages & Salaries 1,800
Other Manufacturing Expenses 1,400 8,200
Administrative Expenses:
Administrative Salaries 600
Administration Expenses 600 1,200
Selling and Distribution Expenses:
Selling and Distribution Salaries 120
Selling Expenses 400 520
Financial Expenses:
Debenture Interest 80
Depreciation 1,520
Total Expenditure (B) 11,520
Profit before taxation (A-B) 3,080
Provision for taxation (770)
Profit after taxation 2,310
From the above information, prepare Value Added Statement for the year 2016-2017 and
determine the amount of bonus payable to employees, if any.
Economic Value Added
19. From the following information of High Ltd., compute the economic value added:
(i) Share capital ` 2,000 lakh
(ii) Reserve and surplus ` 4,000 lakh
(iii) Long-term debt ` 400 lakh
(iv) Tax rate 30%
(v) Risk free rate 9%

(vi) Market rate of return 16%

(vii) Interest ` 40 lakh
(viii) Beta factor 1.05
(ix) Profit before interest and tax ` 2,000 lakh
Human Resource Accounting

20. A company has a capital base of ` 1 crore and has earned profits to the tune of ` 11 lakh.
The Return on Investment (ROI) of the particular industry to which the company belongs
is 12.5%. If the services of a particular executive are acquired by the company, it is
expected that the profits will increase by ` 2.5 lakh over and above the target profit.
Determine the amount of maximum bid price for that particular executive and the maximum
salary that could be offered to him.
SUGGESTED ANSWERS/HINTS
1. (a) (i) Tangible objects or intangible rights carrying probable future benefits, owned by
an enterprise are called assets. Suraj Ltd. sells these empty bottles by calling
tenders. It means further benefits are accrued on its sale. Therefore, empty
bottles are assets for the company.
(ii) As per AS 2 Valuation of Inventories, inventories are assets held for sale in the
ordinary course of business. Inventory of empty bottles existing on the Balance
Sheet date is the inventory and Suraj Ltd. has detailed controlled recording and
accounting procedure which duly signify its materiality. Hence inventory of
empty bottles cannot be considered as scrap and should be valued as inventory
in accordance with AS 2.
(b) As per the facts of the case, Hygiene Ltd. had received a grant of ` 50 lakh in 2008
from a State Government towards installation of pollution control machinery on
fulfilment of certain conditions. However, the amount of grant has to be refunded
since it failed to comply with the prescribed conditions. In such circumstances,
AS 12, Accounting for Government Grants, requires that the amount refundable in
respect of a government grant related to a specific fixed asset is recorded by
increasing the book value of the asset or by reducing the capital reserve or the
deferred income balance, as appropriate, by the amount refundable. The Standard
further makes it clear that in the first alternative, i.e., where the book value of the
asset is increased, depreciation on the revised book value should be provided
prospectively over the residual useful life of the asset. Accordingly, the accounting
treatment given by Hygiene Ltd. of increasing the value of the plant and machinery is
quite proper. However, the accounting treatment in respect of depreciation given by

the company of adjustment of depreciation with retrospective effect is improper and

constitutes violation of relevant Accounting Standards.
2. (a) The balance amount of maintenance provision written back to profit and loss account,
no longer required due to crash of the helicopters, is not a prior period item because
there was no error in the preparation of previous periods financial statements. The
term prior period items, as defined in AS 5 (revised) Net Profit or Loss for the Period,
Prior Period Items and Changes in Accounting Policies, refer only to income or
expenses which arise in the current period as a result of errors or omissions in the
preparation of the financial statements of one or more prior periods. The balance
amount left in the provision created earlier is not as a result of error in the past. So
it will not be considered as prior period item. Such write back of provision is not an
ordinary feature of the business, it shall be considered as an extra-ordinary item.
As per paragraph 8 of AS 5, extraordinary items should be disclosed in the Statement
of Profit and Loss as a part of net profit or loss for the period. The nature and the
amount of each extraordinary item should be separately disclosed in the Statement
of Profit and Loss in a manner that its impact on current profit or loss can be
perceived. Hence, the amount so written-back (if material) should be disclosed as an
extraordinary item as per AS 5 rather than as prior period items.
(b) In response to the market forces, business enterprises often abandon products or
even product lines and reduce the size of their work-force. These actions are not in
themselves discontinuing operations unless they satisfy the definition criteria.
In the instant case the company has been gradually reducing operation in the product
line of washing bars, simultaneously increasing operation in the product line of
washing powders. The company was not disposing of any of its components.
Phasing out a product line as undertaken by the company does not meet definition
criteria in paragraph 3 of AS 24, namely, disposing of substantially in its entirety a
component of the enterprise. Therefore, this change over is not a discontinuing
operation.
3. (a) AS 9 on Revenue Recognition, is mainly concerned with the timing of recognition
of revenue in the Statement of Profit and Loss of an enterprise. The amount of
revenue arising on a transaction is usually determined by agreement between the
parties involved in the transaction. However, when uncertainties exist regarding
the determination of the amount, or its associated costs, these uncertainties may
influence the timing of revenue recognition.
Further, as per accrual concept of fundamental accounting assumptions given in
AS 1 Disclosure of Accounting Policies, revenue should be recognised as and
when it is accrued i.e. recorded in the financial statements of the periods to which
they relate.

In the present case, monthly rental towards licence fee and variable licence fee as
a percentage on the turnover of the tenant though on annual basis is the income
related to common financial year. Therefore, recognising the fee as revenue cannot
be deferred simply because the invoice is raised in subsequent period. Hence it
should be recognised in the financial year of accrual.
Therefore, the contention of the Chief Financial Officer is not in accordance with
AS 9.
(b) AS 16 clearly states that capitalization of borrowing costs should cease when
substantially all the activities necessary to prepare the qualifying asset for its intended
use are completed. Therefore, interest on the amount that has been used for the
construction of the building upto the date of completion (January, 2017) i.e. ` 18 lakhs
alone can be capitalized. It cannot be extended to ` 25 lakhs.
4. (a) As per para 29 of AS 25 Interim Financial Reporting, income tax expense is
recognised in each interim period based on the best estimate of the weighted average
annual income tax rate expected for the full financial year.
`
Estimated Annual Income (A) 10,00,000
Tax expense:
30% on ` 5,00,000 1,50,000
40% on remaining ` 5,00,000 2,00,000
(B) 3,50,000
B 3,50,000
Weighted average annual income tax rate = = = 35%
A 10,00,000
Tax expense to be recognised in each of the quarterly reports `
Quarter I - ` 75,000 x 35% 26,250
Quarter II - ` 2,50,000 x 35% 87,500
Quarter III - ` 3,75,000 x 35% 1,31,250
Quarter IV - ` 3,00,000 x 35% 1,05,000
` 10,00,000 3,50,000

(b) (i) Carrying amount of investment in Separate Financial Statement of Full Ltd.
as on 31.03.2017
`
Amount paid for investment in Associate (on 1.06.2016) 2,00,000
Less: Pre-acquisition dividend (` 50,000 x 30%) (15,000)
Carrying amount as on 31.3.2017 as per AS 13 1,85,000
(ii) Carrying amount of investment in Consolidated Financial Statements of

Full Ltd. as on 31.3.2017 as per AS 23
`
Carrying amount as per separate financial statements 1,85,000
Add: Proportionate share of profit of investee as per equity
method (30% of ` 3,00,000) 90,000
Carrying amount as on 31.3.2017 2,75,000
(iii) Carrying amount of investment in Consolidated Financial Statement of Full

Ltd. as on 30.6.2017 as per AS 23
`
Less: Dividend received (` 60,000 x 30%) (18,000)
5. (a) In the given case, Milk Ltd. concurrently agreed to repurchase the same goods from
Curd Ltd. on 1st Feb., 2017. Also the re-selling price is pre-determined and covers
purchasing and holding costs of Curd Ltd. Hence, the transaction between Milk Ltd.
and Curd Ltd. on 1st Feb., 2017 should be accounted for as financing rather than sale.
The resulting cash flow of ` 9.60 lakhs received by Milk Ltd., cannot be considered
as revenue as per AS 9 Revenue Recognition.
Journal Entries in the books of Milk Ltd.
(` in
lakhs)
1.02.2017 Bank Account Dr. 9.60

To Advance from Curd Ltd . 9.60

(Being advance received from Curd Ltd amounting [ `
8 lakhs + 20% of ` 8 lakhs= 9.60 lakhs] under sale and
re-purchase agreement)
31.03.2017 Financing Charges Account Dr. 0.40
To Curd Ltd. 0.40
(Financing charges for 2 months at ` 1.20 lakhs [10.80
9.60] i.e. 1.2 lakhs x 2/6)
31.03.2017 Profit and Loss Account Dr. 0.40
To Financing Charges Account 0.40
(Being amount of finance charges transferred to P& L
Account)
(b) Calculation of Actual Return on Plan Assets
`
Fair value of plan assets on 31.3.2016 8,00,000
Add: Employer contribution 2,80,000
Less: Benefits paid (2,00,000)
(A) 8,80,000
Fair market value of plan assets at 31.3.2017 (B) 11,40,000
Actual return on plan assets (B-A) 2,60,000
6. (a) As per AS 26 Intangible Assets

(i) For the year ending 31.03.2016
(1) Carrying value of intangible as on 31.03.2016:
At the end of financial year 31 st March 2016, the production process will
be recognized (i.e. carrying amount) as an intangible asset at a cost of
` 28 lakhs (expenditure incurred since the date the recognition criteria
were met, i.e., from 1st December 2015).
(2) Expenditure to be charged to Profit and Loss account:
The ` 22 lakhs is recognized as an expense because the recognition

The balance of Curd Ltd. account will be disclosed as an advance under the heading liabilities in the
balance sheet of Milk Ltd. as on 31st March, 2017.

criteria were not met until 1st December 2015. This expenditure will not
form part of the cost of the production process recognized in the balance
sheet.
(ii) For the year ending 31.03.2017
(1) Expenditure to be charged to Profit and Loss account:
(` in lakhs)
Carrying Amount as on 31.03.2016 28
Expenditure during 2016 2017 80
Total book cost 108
Recoverable Amount (72)
Impairment loss 36
` 36 lakhs to be charged to Profit and loss account for the year ending
31.03.2017.
(2) Carrying value of intangible as on 31.03.2017:
(` in lakhs)
Total Book Cost 108
Less: Impairment loss (36)
Carrying amount as on 31.03.2017 72
(b) (i) Calculation of Annual Lease Payment

`
Cost of the equipment 1,50,000
Unguaranteed Residual Value 20,000
PV of residual value for 3 years @ 10% (` 20,000 x 0.751) 15,020
Fair value to be recovered from Lease Payment 1,34,980
(` 1,50,000 ` 15,020)
PV Factor for 3 years @ 10% 2.487
Annual Lease Payment (` 1,34,980 / PV Factor for 3 years
@ 10% i.e. 2.487) 54,275
Annual lease payments are considered to be made at the end of each accounting year.

(ii) Unearned Finance Income

Total lease payments [` 54,275 x 3] 1,62,825
Add: Residual value 20,000
Gross Investments 1,82,825
Less: Present value of Investments (` 1,34,980 + ` 15,020) (1,50,000)
Unearned Finance Income 32,825
(iii) Segregation of Finance Income

Year Lease Finance Charges Repayment Outstanding
Rentals @ 10% on Amount
outstanding
amount of the year
` ` ` `
0 - - - 1,50,000
I 54,275 15,000 39,275 1,10,725
II 54,275 11,073 43,202 67,523
III 74,275 6,752 67,523 --
1,82,825 32,825 1,50,000
(iv) Profit and Loss Account (Relevant Extracts)

Credit side `
I Year By Finance Income 15,000
II year By Finance Income 11,073
III year By Finance Income 6,752
Balance Sheet (Relevant Extracts)
Assets side ` `
I year Lease Receivable 1,50,000
Less: Amount Received (39,275) 1,10,725
II year Lease Receivable 1,10,725
Less: Received (43,202) 67,523
` 74,275 includes unguaranteed residual value of equipment amounting ` 20,000.

III year :Lease Amount Receivable 67,523

Less: Amount received (47,523)
Residual value (20,000) NIL
Notes to Balance Sheet
`
Year 1
Minimum Lease Payments (54,275 + 54,275) 1,08,550
Residual Value 20,000
1,28,550
Less: Unearned Finance Income (11,073+ 6,752) (17,825)
Lease Receivables 1,10,725
Classification:
Not later than 1 year 43,202
Later than 1 year but not more than 5 years 67,523
Total 1,10,725
Year II:
Minimum Lease Payments 54,275
Residual Value (Estimated) 20,000
74,275
Less: Unearned Finance Income (6,752)
Lease Receivables (not later than 1year) 67,523
III Year:
Lease Receivables (including residual value) 67,523
Less: Amount Received (67,523)
NIL
7. (a) Computation of Basic Earnings Per Share
(as per paragraphs 10 and 26 of AS 20 on Earnings Per Share)
Year Year
2016 2017
` `
EPS for the year 2016 as originally reported
Net profit of the year attributable to equity shareholders
=
Weighted average number of equity shares outstanding during the year

= (` 20,00,000 / 10,00,000 shares) 2.00

EPS for the year 2016 restated for rights issue
= [` 20,00,000 / (10,00,000 shares 1.04 )] 1.92
(approx.)
EPS for the year 2017 including effects of rights issue
` 30,00,000
(10,00,000 shares 1.04 3/12) + (12,50,000 shares 9/12)
` 30,00,000 2.51
11,97,500 shares (approx.)
Working Notes:
1. Computation of theoretical ex-rights fair value per share
Fair value of all outstanding shares immediately prior to exercise of rights + Total amount received from exercise
Number of shares outstanding prior to exercise + Number of shares issued in the exercise
=
( ` 25 10,00,000 shares ) + ( ` 20 2,50,000 shares )
10,00,000 shares + 2,50,000 shares
` 3,00,00,000
= = ` 24
12,50,000 shares
2. Computation of adjustment factor
Fair value per share prior to exercise of rights
=
Theoretical ex-rights value per share
` 25
= = 1.04 (approx.)
` 24 (Refer Working Note 1)
(b) XYZ Ltd.
Segmental Report
(` 000)
Divisions
Particulars A B C Inter Consolidated
Segment Total
Eliminations
Segment revenue
Refer working note 2.

Sales:
Domestic 90 90
Export 6,135 300 270 6,705
External Sales 6,225 300 270 6,795
Inter-segment sales 4,575 45 4,620
Total revenue 10,800 345 270 4,620 6,795
Segment result (given) 240 30 (12) 258
Head office expenses (144)
Operating profit 114
Interest expense (16)
Profit before tax 98
Information in relation to
assets and liabilities:
Fixed assets 300 60 180 540
Net current assets 180 60 135 375
Segment assets 480 120 315 915
Unallocated corporate
assets (75 + 72) 147
Total assets 1,062
Segment liabilities 30 15 180 225
Unallocated corporate
liabilities 57
Total liabilities 282
Sales Revenue by Geographical Market
(` 000)
Home Export Sales Export Export Consolidated
Sales (by A division) to to Total
Rwanda Maldives
External sales 90 6,135 300 270 6,795

8. (a) Impact of various items in terms of deferred tax liability/deferred tax asset
Transaction Analysis Nature of Effect Amount
s difference
Difference in Generally, written Responding Reversal of ` 20 lakhs
depreciation down value method timing DTL 50% = ` 10
of depreciation is difference lakhs
adopted under IT Act
which leads to higher
depreciation in
earlier years of useful
life of the asset in
comparison to later
years.
Disallowanc Tax payable for the Responding Reversal of ` 10 lakhs
es, as per IT earlier year was timing DTA 50% = ` 5
Act, of higher on this difference lakhs
earlier years account.
Interest to It is allowed as No timing Not Not
financial deduction under difference applicable applicable
institutions section 43B of the IT
Act, if the payment is
made before the due
date of filing the
return of income
under section 139(1).
Donation to Not an allowable Permanent Not Not
private expenditure under IT difference applicable applicable
trusts Act.
Share issue Due to disallowance Responding Reversal of ` 5 lakhs
expenses of full expenditure timing DTA 50% = ` 2.5
under IT Act, tax difference lakhs
payable in the earlier
years was higher.
Repairs to Due to allowance of Originating Increase in ` 50 lakhs
plant and full expenditure timing DTL 50% = ` 25
machinery under IT Act, tax difference lakhs
payable of the
current year will be
less.

Deferred Tax Liability Account

` in ` in
lakhs lakhs
31.3.2017 To Profit and Loss 1.4.2016 By Balance b/d 20.00
account 10.00 By Profit and Loss
(Depreciation) Account 25.00
To Balance c/d 35.00 (Repairs to
plant) ____
45.00 45.00
1.4.2017 By Balance b/d 35.00
Deferred Tax Asset Account
` in ` in
lakhs lakhs
1.4.2016 To Balance 10.00 31.3.2017 By Profit and Loss
b/d Account:
Items disallowed
in 2015-2016
and allowed as
per I.T. Act in 5.00
2016-2017
Share issue 2.50
expenses
By Balance c/d 2.50
10.00 10.00
1.4.2017 To Balance 2.50
b/d
(b) As per Schedule III, one of the criteria for classification of an asset as a current asset
is that the asset is expected to be realised in the companys operating cycle or is
intended for sale or consumption in the companys normal operating cycle.
Further, Schedule III defines that an operating cycle is the time between the
acquisition of assets for processing and their realization in cash or cash equivalents.
However, when the normal operating cycle cannot be identified, it is assumed to have
duration of 12 months.
As per the facts given in the question, the process of manufacturing of lotus wine
takes around 18 months; therefore, its realisation into cash and cash equivalents will
be done only when it is ready for sale i.e. after 18 months. This means that normal
operating cycle of the product is 18 months. Therefore, the contention of the

company's management that the operating cycle of the product lotus wine is 18
months and not 12 months is correct. H. Ltd. will classify the raw material purchased
and held in stock as current asset in its Balance Sheet.
9. (a) As per IFRS: IAS 17 requires all leases rentals to be charged to Statement of Profit
and Loss on straight-line basis in case of operating leases unless another systematic
basis is more representative of the time pattern of the users benefit even if the
payments to the lessor are not on that basis.
Carve out: A carve-out has been made to provide that lease rentals, in case of
operating leases, shall be charged to the Statement of Profit and Loss in accordance
with the lease agreement unless the payments to the lessor are structured to increase
in line with expected general inflation to compensate for the lessors expected
inflationary cost increases. If payments to the lessor vary because of factors other
than general inflation, then this condition is not met.
Reason: Companies enter into various kinds of lease agreements to get the right to
use an asset of the lessor. Considering the Indian inflationary situation, lease
agreements contain periodic rent escalation. Accordingly, where there is periodic
rent escalation in line with the expected inflation so as to compensate the lessor for
expected inflationary cost increases, the rentals shall not be straight-lined.
(b) Major Changes in Ind AS 12 vis--vis AS 22
(i) Approach for creating Deferred Tax: Ind AS 12 is based on balance sheet
approach. It requires recognition of tax consequences of differences between
the carrying amounts of assets and liabilities and their tax base. AS 22 is based
on income statement approach. It requires recognition of tax consequences of
differences between taxable income and accounting income. For this purpose,
differences between taxable income.
(ii) Limited Exceptions for Recognition of Deferred Tax Asset: As per
Ind AS 12, subject to limited exceptions, deferred tax asset is recognised for all
deductible temporary differences to the extent that it is probable that taxable
profit will be available against which the deductible temporary difference can be
utilised. The criteria for recognising deferred tax assets arising from the carry
forward of unused tax losses and tax credits are the same that for recognising
deferred tax assets arising from deductible temporary differences. However, the
existence of unused tax losses is strong evidence that future taxable profit may
not be available. Therefore, when an entity has a history of recent losses, the
entity recognises a deferred tax asset arising from unused tax losses or tax
credits only to the extent that the entity has sufficient taxable temporary
differences or there is convincing other evidence that sufficient taxable profit will
be available against which the unused tax losses or unused tax credits can be
utilised by the entity.

As per AS 22, deferred tax assets are recognised and carried forward only to
the extent that there is a reasonable certainty that sufficient future taxable
income will be available against which such deferred tax assets can be realised.
Where deferred tax asset is recognised against unabsorbed depreciation or
carry forward of losses under tax laws, it is recognised only to the extent that
there is virtual certainty supported by convincing evidence that sufficient future
taxable income will be available against which such deferred tax assets can be
realised.
(iii) Recognition of Current and Deferred Tax: As per Ind AS 12, current and
deferred tax are recognised as income or an expense and included in profit or
loss for the period, except to the extent that the tax arises from a transaction or
event which is recognised outside profit or loss, either in other comprehensive
income or directly in equity, in those cases tax is also recognised in other
comprehensive income or in equity, as appropriate. AS 22 does not specifically
deal with this aspect.
(iv) Disclosure of DTA and DTL in Balance Sheet: AS 22 deals with disclosure
of deferred tax assets and deferred tax liabilities in the balance sheet.
Ind AS 12 does not deal with this aspect except that it requires that income tax
relating to each component of other comprehensive income shall be disclosed
as current or non-current asset/liability in accordance with the requirements of
Ind AS 1.
(v) Disclosure Requirements: Disclosure requirements given in the Ind AS 12 are
more detailed as compared to AS 22.
(vi) DTA/DTL arising out of Revaluation of Assets: Ind AS 12 requires that
deferred tax asset/liability arising from revaluation of non-depreciable assets
shall be measured on the basis of tax consequences from the sale of asset
rather than through use. AS 22 does not deal with this aspect.
(vii) Changes in Entities Tax Status or that of its Shareholders: Ind AS 12
provides guidance as to how an entity should account for the tax consequences
of a change in its tax status or that of its shareholders. AS 22 does not deal with
this aspect.
(viii) Virtual Certainty: AS 22 explains virtual certainty supported by convincing
evidence. Since the concept of virtual certainty does not exist in Ind AS 12, this
explanation is not included.
(ix) Guidance for Recognition of Deferred Tax in a Tax Holiday Period: AS 22
specifically provides guidance regarding recognition of deferred tax in the

situations of Tax Holiday under Sections 80-IA and 80-IB and Tax Holiday under
Sections 10A and 10B of the Income Tax Act, 1961. Similarly, AS 22 provides
guidance regarding recognition of deferred tax asset in case of loss under the
head capital gains. Ind AS 12 does not specifically deal with these situations.
(x) Guidance on Certain Issues: AS 22 specifically provides guidance regarding
tax rates to be applied in measuring deferred tax assets/liabilities in a situation
where a company pays tax under section 115JB. Ind AS 12 does not specifically
deal with this aspect.
10. Projected Balance Sheet of Grains Ltd. as on December 31, 2017
Particulars Note No. (`)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 54,00,000
(b) Reserves and Surplus 2 14,25,000
Total 68,25,000
II. Assets
(1) Non-current assets
Non-current Investments 3 60,00,000
(2) Current assets
Cash & Cash equivalents 8,25,000
Total 68,25,000
Projected Profit and Loss Account for the period ending December 31, 2017
Particulars Note No. (`)
I. Other Income 4 1,74,000
II. Total Revenue (A) 1,74,000
I. Expenses
Management Expenses 6,000
II. Total Expenses (B) 6,000
Net Profit before Tax (A-B) 1,68,000

Notes to Accounts
(`) (`)
1. Share Capital
Authorised : 6,00,000 Equity shares of `10 each 60,00,000
Issued : 5,40,000 (WN1) Equity shares of ` 10 each 54,00,000
2. Reserves and surplus
Securities Premium Account (WN 1) 14,25,000
Profit and Loss 1,68,000
Less: Dividend WN 3 (1,68,000) -
14,25,000
3. Non-current Investments
Subsidiary Companies shares at cost 60,00,000
4. Other Income
Dividend Received
Pulses Ltd. (30,00,000 X 5 %) 1,50,000
Cereals Ltd. (12,00,000 X 2 %) 24,000 1,74,000
Working Notes:
1. Share Capital
Pulses Ltd. Cereals
Ltd.
` `
Estimated annual maintainable profits before
deduction
of debenture interest and taxation 6,00,000 2,40,000
Less: Debenture interest - (40,000)
6,00,000 2,00,000
Less: Corporation tax 40 percent (2,40,000) (80,000)
3,60,000 1,20,000
Less: Preference dividend (60,000)
Profit for equity shareholders 3,60,000 60,000

P/E Ratio 15 10
Total consideration (Profit x P.E. Ratio) 54,00,000 6,00,000
Share Issue Price (` 10 + ` 2.5 Premium) ` 12.5 ` 12.5
Number of shares to be issued 4,32,000 48,000
shares shares
Share capital (` 10 x no. of shares to be issued) 43,20,000 4,80,000
Securities premium (` 2.50 x no. of shares issued) 10,80,000 1,20,000
Total shares issued to Pulses Ltd. and Cereals Ltd. = 4,32,000 + 48,000 = 4,80,000
Shares issued to public = 60,000
Total shares issued as on 31 Dec 2017
st = 5,40,000
Securities premium balance
From shares issued to Pulses & Cereals Ltd. = 4,80,000 x 2.5 = ` 12,00,000
From shares issued to public = 60,000 x 3.75 = ` 2,25,000
Total Securities Premium = ` 14,25,000
(2) Bank Account
` `
To Shares issued (Dec. 31, 2017) By Management expenses 6,000
60,000 shares at ` 13.75 each 8,25,000 By Dividend paid (WN 3) 1,68,000
To Dividends received: By Balance c/d 8,25,000
Pulses Ltd. (30,00,000 X 5%) 1,50,000
Cereals Ltd. (12,00,000 X 2%) 24,000
9,99,000 9,99,000
3 Dividend to be paid by Grains Ltd.

Total Shares as on 31st Dec 2017 ` 54,00,000
Less : 60,000 shares not qualifying for dividend (` 6,00,000)
Shares eligible for dividend ` 48,00,000
Dividend @ 3.5 % ` 1,68,000

11. Consolidated Balance Sheet of Mumbai Ltd. and

its subsidiaries Delhi Ltd., Amritsar Ltd. and Kanpur Ltd.
As at 31st March, 2017
Particulars Note ( `)
No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 50,00,000.00
(b) Reserves and Surplus 2 40,32,187.50
(2) Minority Interest (W.N.5) 31,25,312.50
(3) Current Liabilities
Trade payables 5,30,000.00
Total 1,26,87,500.00
II. Assets
(1) Non-current assets
Fixed assets
i. Tangible assets 1,05,00,000.00
ii. Intangible assets [WN 4] 6,37,500.00
(2) Current assets 15,50,000.00
Total 1,26,87,500.00
Notes to Accounts
(`) (`)
1. Share Capital
(Fully paid shares of ` 100 each) 50,00,000.00
2. Reserves and surplus
General Reserve (W.N.6) 25,51,041.67
Profit and Loss Account (W.N.7) 14,81,145.83 40,32,187.50

Working Notes:
Shareholding Pattern
Delhi Amritsar Kanpur
Total Shares 40,000 20,000 60,000
Held by Mumbai 30,000 [75%] 10,000 [50%] 30,000 [50%]
Held by Delhi NA 5,000 [25%] 15,000 [25%]
Held by Amritsar NA NA 5,000 [8.33%]
Minority Interest 25 % 25 % 16.67%
1 Analysis of profits of Kanpur Ltd.
Capital Revenue Revenue
Profit Reserve Profit
` ` `
General Reserve on the date
of purchase of shares 6,00,000.00
Profit and Loss A/c on the 60,000.00
date of purchase of shares
Increase in General Reserve 4,00,000.00
Increase in profit - - 2,60,000.00
6,60,000.00 4,00,000.00 2,60,000.00
Minority Interest (1/6) 1,10,000.00 66,666.67 43,333.33
Share of Mumbai Ltd. (1/2) 3,30,000.00 2,00,000.00 1,30,000.00
Share of Delhi Ltd. (1/4) 1,65,000.00 1,00,000.00 65,000.00
Share of Amritsar Ltd. (1/12) 55,000.00 33,333.33 21,666.67
2 Analysis of profits of Amritsar Ltd.
` ` `
Profit and Loss A/c on the date
of purchase of shares 50,000.00

Increase in Profit and Loss A/c 2,00,000.00

Share in Kanpur Ltd. [WN 1] - 33,333.33 21,666.67
1,50,000.00 1,83,333.33 2,21,666.67
Minority Interest (1/4) 37,500.00 45,833.33 55,416.67
Share of Mumbai Ltd. (1/2) 75,000 91,666.67 1,10,833.33
Share of Delhi Ltd. (1/4) 37,500 45,833.33 55,416.67
3. Analysis of profits of Delhi Ltd.
` ` `
Profit and Loss A/c on the date
Increase in Profit and Loss A/c 2,00,000.00
Share in Kanpur Ltd. [WN 1] 1,00,000.00 65,000.00
Share in Amritsar Ltd. [WN 2] - 45,833.33 55,416.67
4,00,000.00 3,45,833.33 3,20,416.67
Less: Minority Interest (1/4) (1,00,000.00) (86,458.33) (80,104.17)
Share of Mumbai Ltd. (3/4) 3,00,000.00 2,59,375.00 2,40,312.50
4. Cost of control
`
Investments in
Delhi Ltd. 35,00,000
Amritsar Ltd. [11,00,000 + 5,00,000] 16,00,000
Kanpur Ltd. 60,00,000 1,11,00,000
Less: Paid up value of investments in
Delhi Ltd. 30,00,000
Amritsar Ltd. 15,00,000
Kanpur Ltd. [(36+18+6) lakhs/120 lakhs]x100 50,00,000 (95,00,000)
Capital profits in
Delhi Ltd. [W.N.3] 3,00,000

Amritsar Ltd. [W.N.2] 1,12,500

Kanpur Ltd. [W.N.1] 5,50,000 (9,62,500)
Goodwill 6,37,500
5. Minority interest
Share Capital:
Delhi Ltd. (1/4) 10,00,000.00
Amritsar Ltd. (1/4) 5,00,000.00
Kanpur Ltd (1/6) 10,00,000.00 25,00,000.00
Share in profits & reserves
(Pre and Post-acquisitions)
Delhi Ltd. [W.N.3] 2,66,562.50
Amritsar Ltd. [W.N.2] 1,38,750.00
Kanpur Ltd. 2,20,000.00 6,25,312.50
31,25,312.50
6. General Reserve Mumbai Ltd.
Balance as on 31.3.2017 (given) 20,00,000.00
Share in
Delhi Ltd. [W.N.3] 2,59,375.00
Amritsar Ltd. [W.N.2] 91,666.67
Kanpur Ltd. [W.N.1] 2,00,000.00
25,51,041.67
7. Profit and Loss Account Mumbai Ltd.
Balance as on 31.3.2017 (given) 10,00,000.00
Share in
Delhi Ltd. [W.N.3] 2,40,312.50
Amritsar Ltd. [W.N.2] 1,10,833.33
Kanpur Ltd. [W.N.1] 1,30,000.00
14,81,145.83
12. Computation of Equity and Debt Component of Convertible Debentures as on
1.4.2017
`
Present value of the principal repayable after four years 22,44,000

[30,00,000 x 1.10 x .680 at 10% Discount factor]

Present value of Interest 5,70,600
[1,80,000 x 3.17 (4 years cumulative 10% discount factor)]
Value of debt component 28,14,600
Value of equity component 1,85,400
Proceeds of the issue 30,00,000
13. Calculation of Basic & Diluted EPS
2015-2016 2016-2017
Profit before amortization of ESOP cost 18,50,000 22,00,000
Less: ESOP cost amortised (8,37,000) (7,47,000)
Net profit for shareholders 10,13,000 14,53,000
No. of shares outstanding 6,00,000 6,00,000
Basic EPS 1.69 2.42
Potential equity 19,200 33,000
Total no. of equity shares 6,19,200 6,33,000
Diluted EPS 1.64 2.30
Working Notes:
1. Calculation of Potential Equity
2015-2016 2016-2017
a. Actual no. of employees 960 880
b. Options granted per employee 100 100
c. No. of options outstanding 96,000 88,000
d. Unamortised ESOP cost per option (`) (` 18-18/2)9 0
e. Exercise price (`) 55 55
f. Expected exercise price to be received (c x e) (`) 52,80,000 48,40,000
g. Unamortised ESOP cost (c x d) (`) 8,64,000 0
h. Total proceeds (`) 61,44,000 48,40,000
i. Fair value per share 80 88
j. No. of shares issued for consideration (h/i) 76,800 55,000
k. Potential Equity (c-j) 19,200 33,000

2. Calculation of ESOP cost to be amortised

2015-2016 2016-2017
Fair value of options per share ` 18 ` 18
No. of options expected to vest (930 x 100) (880 x 100)
under the scheme 93,000 88,000
Fair value of options 16,74,000 ` 15,84,000
Value of options recognized as (` 16,74,000 / 2) (` 15,84,000 ` 8,37,000)
expenses 8,37,000 7,47,000
14. Return for the year (all changes on a per year basis)
Particulars `/Unit
Change in price (`13.00`12.25) 0.75
Dividend received 1.25
Capital gain distribution 1.00
Total Return 3.00
3
Return on investment = 100 = 24.49%
12.25
If all dividends and capital gain are reinvested into additional units at ` 12.50 per unit the
position would be-
Total amount reinvested = `2.25 300 = `675
675
Additional units added = = 54 units
12.50
Value of 354 units as on 31-12-2017 = `4,602
Price paid for 300 units on 31-12-2016 (300 `12.25) = `3,675
4,602 3,675 927
Return = = = 25.22%
3,675 3,675
15. On the basis of the information given, in respect of hire purchase and leased assets,
additional provision shall be made as under:
(` in crore)
(a) Where hire charges are overdue upto 12 Nil -
months
(b) Where hire charges are overdue for more 10% of the net book value 241
than 12 months but upto 24 months 10% x 2,410

(c) Where hire charges are overdue for more 40 percent of the net book 512
than 24 months but upto 36 months value 40% x 1,280
(d) Where hire charges or lease rentals are 70 percent of the net book 452.90
overdue for more than 36 months but value 70% x 647
upto 48 months
Total 1,205.90
16. (1) Capital employed as on 31st March, 2017 (Refer to Note)

` in lakhs
Land and Buildings 1,850
Machinery 3,760
Furniture and Fixtures 1,015
Patents and Trade Marks 32
Inventory 873
Trade receivables 614
Cash in hand and at Bank 546
8,690
Less: Trade payables 568
Provision for taxation (net) 22 (590)
8,100
(2) Future maintainable profit
(Amounts in lakhs of rupees)
2012-2013 2013-2014 2014-2015 2015-2016
` ` ` `
Profit before tax 3,190 2,500 3,108 2,900
Less: Extraordinary income
due to foreign contract (100)
Add: Loss due to 50
earthquake
Less: Income from non-
trading investments (54) (54)
3,090 2,550 3,054 2,846
Total adjusted trading profits for the last four years
= ` (3,090 + 2,550 + 3,054 + 2,846) = ` 11,540 lakhs

` 11,540 lakhs
Average trading profit before tax = = ` 2,885 lakhs
4
Less: Additional remuneration to directors (50) Lakh
2,835 Lakh
Less: Income tax @ 35% (approx.) (992) (Approx)
1,843 Lakh
(3) Valuation of Goodwill on Super Profits Basis
` in lakh
Future maintainable profits 1,843
Less: Normal profits (20% of ` 8,100 lakhs) (1,620)
Super profits 223
Goodwill at 3 years purchase of super profits = 3 x ` 223 lakhs = ` 669 lakhs
17. Calculation of Intrinsic Value of Equity Shares of Force Ltd.
Net Assets available for Equity Shareholders
` `
Goodwill (W.N.1) 4,14,484
Sundry fixed assets 64,14,960
Trade and non-trade investments
(1,44,000+14,40,000) 15,84,000
Trade Receivables 19,60,000
Inventory 11,00,000
Bank balance 4,00,000
Total Assets 1,18,73,444
Less: Outside liabilities
Secured loan 10,00,000
Trade Payables 30,00,000 40,00,000
Preference share capital 20,00,000 (60,00,000)
Net assets available for equity shareholders 58,73,444
Net Assets Available to Equity Shareholders ` 58,73,444

Value of an equity share = =
Number of Equity Shares 3,00,000
= ` 19.59 (approx.)

Working Notes:
1. Calculation of Goodwill
(i) Capital Employed
` `
Fixed assets:
Building 20,00,000
Plant and machinery (` 22,00,000 + ` 1,45,800) 23,45,800
Furniture 10,00,000
53,45,800
Add: 20% Appreciation 10,69,160
64,14,960
Trade investments (` 16,00,000 x 10% x 90%) 1,44,000
Trade Receivables (` 20,00,000 ` 40,000) 19,60,000
Inventory (` 12,00,000 ` 1,00,000) 11,00,000
Bank Balance 4,00,000 1,00,18,960
Less: Outside liabilities:
Secured Loan 10,00,000
Trade Payables 30,00,000 (40,00,000)
Capital employed 60,18,960
(ii) Calculation of Average Adjusted Profit
2013-2014 2014-2015 2015-2016 2016-2017
` ` ` `
Profit 13,00,000 14,00,000 16,00,000 18,00,000
Add: Capital expenditure on
Machinery charged to - 2,00,000 - -
revenue
Loss on sale of furniture - 50,000 -
13,00,000 16,00,000 16,50,000 18,00,000
Less: Depreciation on - (20,000) (18,000) (16,200)
machinery
Income from non-trade
investments (W.N.2) (1,08,000) (2,16,000)
Reduction in the value of - - - (1,00,000)
inventory
Bad debts - - - (40,000)
Adjusted Profit 13,00,000 15,80,000 15,24,000 14,27,800

Total adjusted profit for four

years 58,31,800
Average profit 14,57,950
(` 58,31,800/4)
Less: Depreciation at 10% on
Additional Value of
Machinery
(22,00,000 + 1,45,800) x
20% x 10% (46,916)
Average Adjusted Profit 14,11,034
(iii) Normal Profit @ 20% on Capital Employed,

i.e. 20% on ` 60,18,960 = ` 12,03,792
(iv) Super Profit = Average Adjusted profitNormal profit
= ` 14,11,034 ` 12,03,792=` 2,07,242
(v) Goodwill = 2 years purchase of super profit = ` 2,07,242 x 2 = ` 4,14,484
2. Trade investments = ` 16,00,000 x 10% x 90% = ` 1,44,000
Non-trade investment = ` 16,00,000 - ` 1,60,000 = ` 14,40,000
Non-trade investment purchased on 1.4.2015 = 50% of ` 14,40,000 = ` 7,20,000
Non-trade investment purchased on 1.4.2016 = ` 14,40,000 ` 7,20,000 = ` 7,20,000
Income from non-trade investment:
In the year 2015-2016 : 7,20,000 x 15% = ` 1,08,000
In the year 2016-2017 : 7,20,000 x 15% = ` 1,08,000
7,20,000 x 15% = ` 1,08,000
` 2,16,000
18. 1. Calculation of Target index
( ` in thousands)
Year 2012 2013 2014 2015 2016
Employees cost 1,300 1,520 1,680 1,968 2,240
Value added 3,040 3,600 4,200 4,800 5,600
Percentage of Employee cost to 42.76% 42.22% 40% 41% 40%
Value added
Target index percentage is taken as least of the above from the employers viewpoint
i.e. 40%.

2. Value Added Statement for the year 2016-2017

(` in thousands) (` in thousands)
Sales 13,600
Less: Cost of bought in goods & services
Materials consumed 5,000
Other manufacturing expenses 1,400
Administrative expenses 600
Selling expenses 400 (7,400)
6,200
Add: Miscellaneous income 500
Dividends and interest 500
Value Added 7,200
3. Employee cost for 2016-2017
(` in thousands)
Wages and salaries 1,800
Administrative salaries 600
Selling and distribution salaries 120
2,520
4. Calculation of target employee cost = Target Index Percentage x Value added
= 40% x ` 7,200 thousands
= ` 2,880 thousands
5. Calculation of savings
Target employee cost = ` 2,880 thousands
Less: Actual Cost = (` 2,520 thousands)
Saving = ` 360 thousands
6. Calculation of Bonus payable for the year 2016-2017:
2/3 of savings is Bonus Payable = ` 360 thousands x 2/3 = ` 240 thousands.

19. High Limited

Computation of Economic Value Added
Economic Value Added (` in Lakh)
Net Operating Profit after Tax (Refer Working Note 5) 1,372.00
Add: Interest on Long-term Fund (Refer Working Note 2) 28.00
1,400.00
Less: Cost of Capital ` 6,400 lakh 15.77% (Refer working notes 3 and 4) (1,009.28)
Economic Value Added 390.72
Working Notes:
1. Cost of Equity = Risk free Rate + Beta Factor (Market Rate Risk Free Rate)
= 9% + 1.05 (16 9) = 9% + 7.35% = 16.35%
2. Cost of Debt
Interest ` 40 lakhs
Less: Tax (30%) (` 12 lakhs)
Interest after Tax ` 28 lakhs
28
Cost of Debt = 100 = 7%
400
3. Weighted Average Cost of Capital
Cost of Equity ` 6,000 lakhs 16.35% (W.N.1) ` 981 lakhs
Cost of Debt ` 400 lakhs 7% (W.N.2) ` 28 lakhs
` 1,009 lakhs
1,009
WACC = 100 = 15.77% (approx.)
6,400
4. Capital Employed
(` in lakhs)
Share Capital 2,000
Reserves and Surplus 4,000
Long term debts 400
6,400

5. Net Operating Profit after Tax

(` in lakhs)
Profit before Interest and Tax 2,000
Less: Interest (40)
1,960
Less: Tax 30% on 1,960 Lakhs (588)
Net Operating Profit after Tax 1,372
20.
Capital Base = ` 1,00,00,000
Actual Profit = ` 11,00,000
Target Profit @ 12.5% = ` 12,50,000
Expected Profit on employing the particular executive
= ` 12,50,000 + ` 2,50,000 = ` 15,00,000
Additional Profit = Expected Profit Actual Profit
= ` 15,00,000 ` 11,00,000 = ` 4,00,000
Additional Pr ofit 4,00,000
Maximum bid price = = 100 = ` 32,00,000
Rate of Re turn on Investment 12.5
Maximum salary that can be offered = 12.5% of ` 32,00,000 i.e., ` 4,00,000
Maximum salary can be offered to that particular executive upto the amount of additional
profit i.e., ` 4,00,000.

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PAPER 1: FINANCIAL REPORTING

PART I : RELEVANT AMENDMENTS, NOTIFICATIONS AND ANNOUNCEMENTS

A. Applicable for November, 2017 Examination

The Institute of Chartered Accountants of India

Name of Para no. As per the As per the Implication

The Institute of Chartered Accountants of India

Name of Para no. As per the As per the Implication

The Institute of Chartered Accountants of India

Name of Para no. As per the As per the Implication

The Institute of Chartered Accountants of India

Name of Para no. As per the As per the Implication

The Institute of Chartered Accountants of India

Name of Para no. As per the As per the Implication

The Institute of Chartered Accountants of India

Name of Para no. As per the As per the Implication

The Institute of Chartered Accountants of India

Name of Para no. As per the As per the Implication

The Institute of Chartered Accountants of India

Name of Para no. As per the As per the Implication

The Institute of Chartered Accountants of India

Name of Para no. As per the As per the Implication

The Institute of Chartered Accountants of India

Name of Para no. As per the As per the Implication

The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India

Consequential amendments to other Ind AS on the omission of Ind AS 115 and

The Institute of Chartered Accountants of India

Ind AS Significant amendments

The Institute of Chartered Accountants of India

Ind AS Significant amendments

The Institute of Chartered Accountants of India

Ind AS Significant amendments

The Institute of Chartered Accountants of India

A. Amendments in Ind AS 7 'Statement of Cash Flows'

The Institute of Chartered Accountants of India

The amendment to Ind AS 102 with respect to measurement of cash-settled

The Institute of Chartered Accountants of India

and loss before the remeasured liability is reclassified into equity.

The Institute of Chartered Accountants of India

6. Amendment in Schedule III to the Companies Act, 2013

The Institute of Chartered Accountants of India

2. Non-deposit taking NBFCs (NBFCs-ND) (those with assets of less than

The Institute of Chartered Accountants of India

(i) Non-Banking Financial (Deposit Accepting or Holding) Companies

The Institute of Chartered Accountants of India

9. Relevant Sections of the Companies Act, 2013

AS 10: Property, plant and Equipment

The Institute of Chartered Accountants of India

The principal issues in Accounting for PPE are:

Determination of Impairment losses

2. Scope of the Standard

Wasting Assets including Mineral rights,

The Institute of Chartered Accountants of India

Note: Intangible items are covered under AS 26.

The Institute of Chartered Accountants of India

Living Animal AS 10 does not apply

II. Bearer Plant: Is a plant that (satisfies all 3 conditions):

Is used in the production or Of Agricultural

For more than a

Has a remote likelihood of

The Institute of Chartered Accountants of India

Living Animal AS 10 does not apply

II. Bearer Plant: Is a plant that (satisfies all 3 conditions):