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AN INTRODUCTION TO IND AS
ABBREVIATION STANDS FOR NOS WHO ISSUED

IFRS International Financial Reporting Standards 1-15 IASB
IAS International Accounting Standards 1-41 IASC
IND AS Indian Accounting Standards 1-41, 101-115 ASB (Notified by CG)
Indian GAAPS Indian General Accepted A/C Principles 1-29 ASB (Notified by CG)
In the presentation of the Union Budget 2014–15, the Honorable Minister for Finance, Corporate Affairs and Information
and Broadcasting proposed the adoption of Ind AS. The Minister clarified that the respective regulators will separately
notify the date of implementation for banks and insurance companies. Also, standards for tax computation would
be notified separately. In accordance with the Budget statement, the MCA has notified Company (Indian Accounting
Standard) Rules 2015 vide its G.S.R dated 16 February 2015. Accordingly, it has notified 39 Ind AS and has laid down
an Ind AS transition road map for companies other than banking companies, insurance companies and non- banking
finance companies.
Ind AS roadmap
Salient features:
◘◘ Early adoption permitted from 1 April 2015, with one year comparatives
◘◘ Once adopted, cannot be revoked
◘◘ Companies not covered by the roadmap to continue to apply existing standards
◘◘ Phase I applicable from 1 April 2016 onward to:
Listed or unlisted companies whose net worth is >= INR 500 crores
Holding, subsidiaries, joint ventures or associates of these companies
◘◘ • Phase 2 is applicable from 1 April 2017 onward to:
Listed companies whose net worth is < INR 500 crores
Unlisted companies whose net worth is >= INR 250 crores but < INR 500 crores
Holding, subsidiaries, joint ventures or associates of these companies
◘◘ Net worth for a company is to be calculated in accordance with its stand-alone financial statements as on
31 March 2014 or the first audited financial statements for accounting period which ends after that date.
Accordingly, if any company’s networth is more than INR 500 crore as of March 31, 2015, then it will be covered
in Phase 1 itself.
◘◘ Overseas subsidiary, associate, joint venture and other similar entity (ies) of an Indian company may prepare
its stand-alone financial statements in accordance with the requirements of the specific jurisdiction. However,
for group reporting purpose (s), it will have to report to its Indian parent under Ind AS to enable its parent to
present CFS in accordance with Ind AS.
◘◘ As per exemption under Rule 5, Insurance companies, banking companies and non-banking Finance companies
are not required to apply Ind AS for preparing their financial statements Either voluntarily or mandatorily, as
specified in the roadmap (sub-rule (1) of rule 4).
ii Accounting Standards
FRIENDS EVEN GO THROUGH THE FOLLOWING SIMPLIFIED NOTES

(1) Ind AS: From years it was not well decided how much IFRS to be followed by Indian Companies. Need arises to get
our financial statements more modernize and standardized with the global scenario. A way out through it was to
adopt Ind AS. Adopting Ind AS is a convergence of IFRS. Ind AS is in substitution of IFRS to get Indian Co listed abroad
and demand cheaper capital from cash rich countries.
(2) Carve in and Carve outs: As already discussed above that Ind AS is a modified IFRS or converged IFRS. The differ-
ence between Ind AS and IFRS / IAS is known as Carve outs / Carve ins.
(3) Road map of Indian companies to become IFRS compliant?
On 16 February 2015, the MCA notified the Companies Accounting Standards rules 2015 laying down the roadmap
for application of IFRS converged standards.
Year Type companies
2014-2015 N. A.
2015-2016 All companies may voluntarily follow Ind AS irrespective of their Net Worth.
2016-2017 All companies whose Net Worth.is ≥ 500 crores as on 31/3/2015 or 31/3/2016.
Holding, Subsidiary, Associates and JV of above.
2017-2018 All balance listed companies should follow Ind AS irrespective of their Net
Worth.
Unlisted companies whose Net worth ≥ 250 crores in any of the year 31/32015
/ 31/3/2016, 31/3/2017.
Holding, Subsidiary, Associates and JV of above.
Special Comments:
(i) The above road map is not applicable to NBFC, Banks, Insurance Companies.
(ii) The above road map is also not applicable to SME listed with the Stock Exchange.
(iii) Subsidiary includes sub – subsidiary.
(iv) Once Ind AS is adopted reverting back is not allowed.
Explain Net Worth?

Net Worth is defined as per section 2 (57) of the Companies Act 2013;
(i) Paid up Share Capital
(ii) Profit / Reserves arising out of the appropriations.
(iii) Securities Premium
Deduct from above: Accumulated losses, Miscellaneous exp., Deferred revenue expenditure.
Not to consider: Capital Reserves arising out of Amalgamation and revaluation reserves.
Problems: Comment on the date of applicability of Ind AS in the following cases:
(i) X Ltd has a subsidiary S Ltd, Sub subsidiary SS Ltd. Associate A Ltd and Sub associate AA Ltd. For the year
2015-2016 X Ltd is voluntarily following Ind AS.
(ii) R Ltd has a NW of 330 crores (unlisted co) as on 31/3/2014. Thereafter it fell down to 100 cr.
(iii) X Ltd has a subsidiary Suraj Bank Ltd, X Ltd is a listed company is having an average NW of 100-150 cr.
(iv) R Ltd has a foreign subsidiary S Ltd, NW of R Ltd is 270 cr as on 31/3/2016. R Ltd is a listed co.
(v) Following details are provided by Basharta Ltd as on 31/3/2015 a listed co.:
10 cr Equity Shares of ` 10 each.
12% 2 cr Preference Shares of ` 100 each
Contents iii
Calls in Arrears ` 50 lakhs

Share application money ` 75 lakhs
General Reserves ` 20 crores
Profit / loss bal. ` 200 cr.
Revaluation Reserves ` 60 crores
Sinking Fund ` 3 cr
Unamortized share issue / underwriting exps: ` 1 cr
Heavy advertisement (c/f) ` 2 crores.
Securities Premium `. 170 crores.
Share Warrants `. 50 lakhs
ESOP O/S `. 3 crores.
Solution:
Company Year Reason
1) X Ltd 2015-2016 Voluntarily (SFS+CFS)
S Ltd 2015-2016 Subsidiary
SS Ltd 2015-2016 Subsidiary includes sub subsidiary
A Ltd 2015-2016 Associate of X Ltd
AA Ltd - Sub associate is not covered
2) R Ltd - NW before 2014-2015 is irrelevant. NW is below the limit
of 250 cr. From 2014-2015. Also it is an unlisted co. But the
company may voluntarily adopt Ind AS.
3) X Ltd 2017-2018 Being a listed co. the NW > 500 cr. But it is only 100 cr avg.
This criteria is not satisfied. But every listed co should
ultimately follow Ind AS for 2017-2018.
Suraj Bank For CFS as well as for SFS no Ind AS being a Bank.
4) R Ltd 2017-2018 Being a listed co. the NW > 500 cr. This criteria is not
satisfied. But every listed co should ultimately follow Ind AS
for 2017-2018.
S Ltd is registered in a foreign country hence in SFS no Ind
S Ltd AS to be followed.
For CFS purpose it is the responsibility of holding company
to converge the accounts of subsidiary into Ind AS.
5) Basharta 2016-2017 NW > 500 crores as on 31/3/2015 (preceding period)…….
Ltd see WN
WN) Calculation of Net Worth for 31.03.2015
Particulars Amt Cr. Reason
10 cr Equity Shares 10x10 100 Capital
12% 2 cr Preference Shares 200 Capital
Calls in Arrears ` 50 lakhs (50) Deduction from paid up capital
250
Share application money - It is not a capital
General Reserves 20 Appropriations
Profit / loss bal. 200 Main P/L balance
Revaluation Reserves - Specific excluded
Sinking Fund 3 Appropriations
Unamortized exps: (1) (-) for net worth
Heavy advertisement (c/f ) . (2) (-) for net worth
Securities Premium 170 Specific inclusion
Share Warrants - Not a SCapital or P/L bal.
ESOP O/S - Not a SCapital or P/L bal.
Net Worth: 640
iv Accounting Standards
C A R V E O U T S / I N S : I F R S VS I N D A S
VERY IMPORTANT AND MAJOR CARVE OUTS

CLASSIFICATION OF LOAN WITH COVENANT BREACHES: LOAN WHICH IS NON - CURRENT
LIABILITY
Facts of the case: Outstanding long term loan. Breach occurred before 31/March. The loan becomes payable on demand.
IAS 1: As per IAS -1 if any breach regarding repayment of loan is prevailing before B/S date which was classified as non
– current then such loan is treated as Current liability even if the breach is rectified after B/S date.
IND AS 1: But in case of Ind AS 1 if the breach is rectified after B/S date but before the approval date, then it is reclassified
as a Non - Current liability.
Reason: In India for a better bank and customer relationship the loan is generally not recalled. There are many
formalities for recalling the loan. The users should be informed that the loan is non - current if the breach is rectified
after the Balance sheet date. The users should not panic.
BREACH RECTIFIED AFTER THE BALANCE SHEET DATE (EVENTS OCCURRING)

IAS 10: As per IAS -1 if any breach regarding repayment of loan is prevailing before B/S date such loan is treated as
Current liability even if the breach is rectified after B/S date. This means the breach rectified is not an adjusting event.
IND AS 10: But in case of Ind AS 1 if the breach is rectified after B/S date but before the approval date, then it is
reclassified as a Non - Current liability. Yes it is an adjusting event.
Reason: In India for a better bank and customer relationship the loan is generally not recalled. There are many
formalities for recalling the loan. The users should be informed that the loan is non - current if the breach is rectified
after the Balance sheet date. The users should not panic.
EMPLOYEE BENEFITS – DISCOUNT RATE:

IAS 15: Requires use of corporate quality bond rates for discounting retirement costs.
IND AS 15: Mandatory use of government securities yield (Rf) for determining actuarial liabilities. But for foreign
subsidiaries it is quality bond rate. This is similar to Lord Krishna having both Radha and Meera.
Reason: For Indian companies the most reliable and suitable discounting risk free rate will be G-Sec rate. More popularly
known as Rf .
BUSINESS ACQUISITIONS – GAIN ON BARGAIN PURCHASE:

IFRS 3: ‘Bargain purchase gains’ in a business combination recognized as income in the statement of profit and loss (Oh
My God ……..bargain gain treated as realised profit)
IAS 28: Similarly as per IAS – 28 Goodwill or Profit / loss is disclosed in Investments in Associates.
IND AS 103: Recognition of ‘bargain purchase gains’ in a business combination is treated as a ‘Capital Reserve’.
IND AS 28: In Consolidated Financial Statements for Investments in Associates it is Goodwill / Capital Reserves which
needs to be identified.
Reason: It is felt that recognition of such gains in profit / loss would result into recognition of unrealized gains. If it is
treated as profits then dividends has to be distributed out of the profits.
JOURNALS
IFRS-3
Sundry Assets Dr xxx
G/W Dr xxx (bal fig)
To Sundry liabilities xxx
To Profit / loss a/c xxx (bal fig)
Ind AS-103
Sundry Assets Dr xxx
G/W Dr xxx (bal fig)
To Sundry liabilities xxx
To Capital Reserve xxx (bal fig)
FOREIGN CURRENCY CONVERTIBLE BONDS:

IAS 32: Conversion option treated as a derivative and carried at fair value (revalued). This means the conversion option
is FVTPL which will be recognized in P/L.
IND AS 32: Embedded instrument (foreign currency conversion option) is treated as ‘equity’ and accordingly not to be
revalued. It is treated as equity because the issuer will issue its fixed shares at a fix price.
Reason: Actually speaking Ind AS is correct in its presentation. IAS 32 should be rectified as the settlement of FCCB is
by issuing fixed shares at fixed exercise price.
LEASE RENTALS
IAS 17 : In case of operating lease the rentals are recorded on Straight-line basis or based on the substance of the
agreement.
IND AS 17: No straight-lining for escalation of lease rentals in line with expected general inflation (if such clause is a
part of the lease agreement). Lease rentals for the factors other than inflation should be straight lined.
Reason: In India based on the inflationary conditions inclusion of inflation clause is very common in the operating lease
agreement.
FOREIGN EXCHANGE FLUCTUATION
IFRS 101 + IAS 21: No provision in IFRS.

IND AS 101 + IND AS 21: Foreign exchange fluctuations Option as per Companies Act or AS – 11 para 46A provides
recognition of exchange regarding the long term monetary item. Entities are required to continue the policy adopted for
accounting for exchange differences arising from translation of long-term foreign currency monetary items recognized
in the financial statements for the period ending immediately before the beginning of the first Ind AS financial reporting
period as per the previous GAAP. Remember if the loan is used for acquiring depreciable fixed assets then such exchange
difference is capitalized. If the long term loan is utilized for other purpose then the exchange difference will be amortised
till the repayment of loan.
In short Government notification is to be followed for existing loans. And for the fresh loans after the application of Ind
AS the entities should transfer the exchange difference to OCI.
Reason: This is the option inserted by Central Government from the year 2011-2012. As per the notification it is an
option adopted by the entity. Government notifications are binding over Accounting Standards.
AMORTIZATION OF TOLL ROADS:

IFRS 38: As the toll roads rights are intangible assets it is to be written of like any other intangible assets. Recall even as
per AS-26 also intangibles are written off in the ratio of benefits derived from the asset or SLM.
vi Accounting Standards
IND AS 38: Toll roads are covered by Schedule II and will be continued to be covered. As per Schedule II – Toll roads
as Intangible Assets are required to be amortised in the ratio of estimated revenue, also known as Revenue based
amortization.
Reason: Again law prevails over Standards. Schedule II is prepared by Central Government which has an over - riding
effect over the Standards.
Penalty from Contracts (Revenue Recognition)
IFRS 115: Penalties levied in the performance contract should be considered as variable consideration. It means if the
share of revenue in a franchisee agreement is 60%. Penalty is 2%. Then as per IFRS the revenue will be 58% of the fees.
IND AS 115: Ind AS 115 goes by the substance over form criteria. Accordingly the penalty levied will be recognized as
per the substance of the contract.
If the penalty is based on revenue à Net off revenue i.e. 58%.
If the penalty is not based on revenue à Revenue should be fix and penalty should be separately recorded.
Reason: Variable consideration entails complex calculation which may not be acceptable by Indian Accountants.
FIRST TIME ADOPTION OF IND AS / IFRS (COST FOR ASSETS FROM TRANSITION)
IFRS 1: As per IFRS: IFRS 1 First time adoption of International Accounting Standards provides that on the date of
transition either the Cost of PPE / Intangible Assets / Investment Property, shall be determined by applying IAS 16
‘Property, Plant and Equipment’ retrospectively or the same should be recorded at fair value.
IND AS 101: In Ind AS 101 an option is given to the entity to adopt the previous GAAP carrying amount as the deemed
cost for the first time while adopting Ind AS.
Reason: This would facilitate smooth transition towards Ind AS. It also minimizes the cost of convergence. Fair values
may not be possible for old assets in India. Have you heard……..Puraani Kamar Belly Dance nahi Kar sakti hain.
INVESTMENTS IN ASSOCIATES AND JV (DIFFERENT ACCOUNTING POLICIES):

IAS 28 : Accounting policies of joint - ventures and associates should be same that of the parent (investor). If not then
the accounting policies of JV and Associates are required to undergo a change.
IND AS 28: If it is not possible to (impracticable) do so in such case the accounting policies of joint – ventures and
associates with that of the investor may not be same.
Reason: Since the investor has significant influence and not control over the associate or even JV, it is not necessary that
the associates / JVs will change their accounting policy.
OTHER / MISCELLANEOUS CARVE OUTS

COMPARISON OF IND AS-1 WITH IAS -1
(i) IAS 1 has the option either to follow the single statement approach or to follow the two statement approach. Ind AS
1 allows only the single statement approach (i.e. P/L and OCI is within same single statement.).
(ii) IAS 1 permits the periodicity, for example, of 52 weeks for preparation of financial statements. As Ind AS 1 does not
permit it, the same is deleted.
(iii) IAS 1 requires an entity to present an analysis of expenses recognized in profit or loss using a classification based
on either their nature or their function viz: Production costs, Selling expenses, Administration expenses. Ind AS 1
requires only nature-wise classification of expenses (please refer Schedule III).
Similarly in Ind AS – 34 only single statement is followed and in IAS 34 the entities should follow option of single or
two statements approach.
DIFFERENCES BETWEEN IND AS-7 AND IAS-7

As per IAS – 7 Interest / Dividend paid alternatively can be classified as CFOA. Similarly Interest / Dividend received can
be classified as CFOA. But in case of Ind AS-7 the above mentioned items are still covered by CFFA and CFIA i.e. as AS-3
(Rev).
(i) Some presentation difference exists between standards which does not make much difference. .
(ii) Deferred tax in Business combination which reduces the G/W is credited to bargain purchase gain (profit / loss
a/c.). But in Ind AS it is transferred to Capital Reserve.
DIFFERENCES BETWEEN IND AS-40 AND IAS-40 OR EVEN IND AS – 17 AND IAS – 17.
IAS – 40 gives an option to the companies to value its Investments Property at Cost or Revalued Model. Ind AS – 40
strictly want companies to follow COST Model for Investment Properties. This is because such revaluation difference
will then be transferred to P/L account which will not be accepted by Indian Accounting Standard Board.

As per IAS – 19: The recognition of actuarial gain / loss has 3 options: i) transferred immediately to OCI; ii) corridor
approach of 10% ; iii) Fast write – off: The entire g/l is amortized equally over the balance life of employees. In case of
Ind AS-19: The Actuarial g/l is immediately consumed by the OCI.
Differences between Ind AS-20 and IAS-20

ALSO USEFUL FOR IND AS 16 / 38 AND IAS 16 / 38.
(i) As per IAS – 20 Non – Monetary Grants can be recorded either at fair value or at a nominal value. As per Ind AS – 20
only Fair Value is permitted.
(ii) For Depreciable Fixed Assets Capital approach (deduction from asset) or deferment of income is optional in IAS –
20. But in case of Ind AS – 20 Government grants should be recognized only on deferred basis. Reduction from asset
is not allowed.

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

Somewhere AS-24 wants us to define related party based on the term influence. Ind AS-24 provides specific names of
relative i.e. relatives as defined in Companies Act.

(i) In Ind AS-33 EPS only as per CFS is required. But in IAS-33 EPS both as per Stand Alone Statement as well as CFS is
required.
(ii) As per para 12 of Ind AS -33 if any item is adjusted in securities premium if it could be adjusted otherwise in profit
/ loss account, then the amount thereof shall be credited or debited to profit from ordinary activities. In IAS-33 no
such provision exists.
Illustration: Pillu Paiki Ltd earns net profit post tax for 2015-16 ` 33,000. During the year underwriting commission
is incurred ` 2,000. The same is adjusted in securities premium a/c. WANES = 1000 shares. Compute EPS for 2015-16.
Tax 30%.
Solution: EPS for 2015-16 = 33000 + 1400 / 1000 = 34400 / 1000 = ` 344.
As per Ind AS-1 the single statement covers Proiit / loss account as well
DIFFERENCES IND AS 23, IAS 23

Exchange Difference: IAS 23 provides no guidance as to how the adjustment for exchange differences arising from
foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs (as prescribed in
paragraph 6(e)) is to be determined. Ind AS 23 provides guidance in this regard.
viii Accounting Standards
DIFFERENCES IND AS 27, IAS 27

Separate Financial Statements: IAS 27 requires to disclose the reason for preparing separate financial statements if
not required by law. In India, since the Companies Act mandates preparation of separate financial statements, such
requirement has been removed in Ind AS 27.
Option to use Equity Method: IAS 27 allows the entities to use the equity method to account for investment in subsidiaries,
joint ventures and associates in their Separate Financial Statements (SFS). This option is not given in Ind AS 27, as the
equity method is not a measurement basis like cost and fair value but is a manner of consolidation and therefore would
lead to inconsistent accounting conceptually.
RECONCILIATION OF ACCOUNTING STANDARDS

IAS / IFRS IND AS CORRESPONDING INDIAN GAAP
IAS - 1 IND AS – 1 AS-1: Disclosure of Accounting Policies
IAS – 2 IND AS – 2 AS – 2 Inventories
IAS – 3 IND AS – 3S Deleted
IAS – 4 IND AS – 4 Deleted
IAS – 7 IND AS – 7 AS – 3 Cash Flow Statement
IAS – 8 IND AS – 8 AS – 1and AS- 5: Net profit / Extraordinary……
IAS – 10 IND AS – 10 AS-4 : Events occurring after the B/S date
IAS – 11 IND AS – 11 AS-7 : Construction Contracts#
IAS – 12 IND AS – 12 AS-22 Income tax
IAS – 16 IND AS – 16 AS-10, AS-6 and Schedule II: Fixed Assets / Depn
IAS – 17 IND AS – 17 AS-19 Leases
IAS – 18 IND AS – 18 AS-9 Revenue recognition #
IAS – 19 IND AS – 19 AS-15 Employee Benefits
IAS - 20 IND AS – 20 AS-12 Government Grants
IAS – 21 IND AS – 21 AS-11 Effect of Exchange rates
IAS – 23 IND AS – 23 AS-16: Borrowing cost
IAS – 24 IND AS – 24 AS-24: Related Party
IAS – 27 IND AS – 27 No I-GAAP: Separate financial statement
IAS – 28 IND AS – 28 AS-23 and AS-27: Investments in Associates and JV
IAS – 29 IND AS – 29 No I-GAAP: Hyper inflationary
IAS – 32 IND AS – 32 Financial Instruments – Presentation*
IAS – 33 IND AS – 33 AS-20 EPS
IAS – 34 IND AS – 34 AS-25: Interim Financial Statements
IAS – 36 IND AS – 36 AS-28: Impairment of Assets
IAS – 37 IND AS – 37 AS-29: Provisions / Contingent Liabilities / Assets
IAS – 38 IND AS – 38 AS-26: Intangible Assets
IAS – 40 IND AS – 40 No I GAAP – Investments Property
IAS – 41 IND AS – 41 No I GAAP- Agriculture
IFRS –1 IND AS -101 No I GAAP- First time adoption of Ind AS.
IFRS –2 IND AS – 102 Guidance Notes – Share Based Payments
IFRS –3 IND AS – 103 AS-14: Amalgamation / Business Combinations
IFRS –4 IND AS – 104 No I GAAP- Insurance Contracts***
IFRS –5 IND AS – 105 AS-24: Non - Current Assets Held for sale / Discontinuing Operations
IFRS –6 IND AS – 106 No I GAAP- Exploration / Evaluation of mineral resources
IFRS –7 IND AS – 107 Financial Instruments – disclosure*
IFRS –8 IND AS – 108 AS – 17: Operating Segments
IFRS –9 IND AS – 109 Financial Instruments – Recognition*
IFRS –10 IND AS – 110 AS- 21 + 27 Consolidation of FS
IFRS –11 IND AS – 111 AS – 27: Joint Arrangement.
IFRS –12 IND AS – 112 No I GAAP – Disclosure of interest in another entity
IFRS –13 IND AS – 113 No I GAAP – Fair Valuation
IFRS –14 IND AS – 114 No I GAAP – Regulatory deferral A/Cs.
IFRS –15 IND AS – 115 AS - 9+ AS – 7: Revenue from Contracts with Contractors. #
Note:
* These Standards are no more AS-30/31/32. But they have been fully adopted as per IFRS.
# Construction contracts and revenue recognition will be converted into Revenue from customers. Standards like Ind
AS – 113, 114, 115 has not been fully adopted world wide. Many countries have postponed it.
PART II
Ind AS
Chapter 1 Ind AS 1: Presentation of Financial Statements 1
Chapter 2 Ind AS 2: Inventories 12
Chapter 3 Ind AS 7: Cash Flow Statements 15
Chapter 4 Ind AS 8: Changes in Accounting Estimates, Policies and Errors 18
Chapter 5 Ind AS 10: Events after the Balance Sheet Date 22
Chapter 6 Ind AS 12: Taxes on Income 24
Chapter 7 Ind AS 16: Plant, Property and Eqipment 29
Chapter 8 Ind AS 17: Leases 36
Chapter 9 Ind AS 19: Accounting for Employees Benefits 40
Chapter 10 Ind AS 20 / IAS 20: Accounting for Government Grants and
Disclosure of Government Assistance 43
Chapter 11 Ind AS 21: Effects of Changes in Foreign Exchnage Rates 47
Chapter 12 Ind AS 23: Borrowing Costs 54
Chapter 13 Ind AS 24: Related Party 56
Chapter 14 Ind AS 33: Earning Per Share 61
Chapter 15 Ind AS 34: Interim Financial Reporting (IFR) 66
Chapter 16 Ind AS 36: Impairment of Assets 68
Chapter 17 Ind AS 37: Events after the Balance Sheet 70
Chapter 18 Ind AS 38: Intangible Assets 75
Chapter 19 Ind AS 40 / IFRS 40: Investments Property 78
Chapter 20 Ind AS 41 / IAS 41: Agriculture 83
Chapter 21 Ind AS-105 Noncurrent Assets Held for Sale and Discontinued Operations 88
Chapter 22 Ind AS 108: Operating Segments 95
Chapter 23 FINANCIAL INSTRUMENTS: IND AS – 109 / IFRS – 9: Recognition
IND AS – 107 / IFRS – 7: Presentation, IND AS – 32 / IAS – 32: Disclosures 98
Question Paper—CA Final-May 2016 144
CHAPTER 1
Ind AS 1: Presentation of
Financial Statements
Chapter Outline
vv Financial Statements – Purpose: vv Reclassification adjustments:
vv Please refer Schedule III (Revised) vv Disclosure of Significant accounting
as per Companies Act 2013. policies: (same as AS-1)
vv Information to be presented in OCI Section
Financial Statements – Purpose

◘◘ Structured representation of financial information about an entity.
◘◘ Provide useful information to the users for making economic decisions.
Complete Set of Financial Statements:
Ind AS 1
Balance Sheet (Includes SOCE)
Statement of P & L
Statement of Cash Flow
Note
Separate comparative FS
Special case
Statement of P &L and Other Comprehensive Income shall have 2 components:

(i) Profit and Loss
(ii) Other Comprehensive Income
2 Accounting Standards
True and Fair View

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

Going Concern: (same as AS-1)
◘◘ Management should make an assessment of entity’s ability to continue as going concern
◘◘ Intends to liquidate or cease trading or does not have no realistic alternative than to do so.
◘◘ If not prepared on going concern basis, disclose that fact and the reasons.
Accrual Basis of Accounting: (same as AS-1)
◘◘ Prepare FS on accrual system (income on earned basis and expenses on incurred basis).
Materiality and Aggregation
◘◘ Present separately each material class of similar items
◘◘ Present separately items of dissimilar nature unless they are immaterial
Offsetting
An entity should not offset assets and liabilities unless permitted by Ind AS or Law. For ex: DTA and DTL
can be off – set in presentation as per Schedule – III. Also in case of Ind AS-37 (Provisions) Provisions can be
netted off from reimbursement.
Frequency of Reporting:
yy At least annually yy For a period longer or shorter than one year, then disclose:
ww Reason for using longer/shorter period
ww Fact that amounts represented are not totally comparable
Comparative Information:
yy Should have comparatives with all yy When

the amounts reported in current ww Accounting policy retrospectively
period financial statements ww Retrospective restatement
ww Reclassifies items
yy Present 3 balance sheets and two statements
ww Current period end
ww Previous period end
ww Beginning of earliest comparative period end
Ind AS 1: Presentation of Financial Statements 3
yy When the entity changes the yy Disclosures when reclassification made:

presentation or classification of ww Nature of the reclassification;
items in its financial statements, ww The amount of items reclassified
the entity shall reclassify compara-
ww Reason for the reclassification
tive amounts unless reclassification
is impracticable
yy Reason for the reclassification
ww Reason for not reclassifying the amounts
ww Nature of the adjustments that would have been made if the amounts
had been reclassified.
Identification features of Financial Statements

◘◘ Identify clearly FS from other information published in the same document
◘◘ Distinguish financial statement and notes
◘◘ Display the following pieces of information prominently for each financial statement:
(a) Name of reporting entity
(b) Separate or consolidated financial statements
(c) Date of end of reporting period
(d) Presentation currency (as per Ind AS – 21)
(e) Level of rounding off (even governed by Schedule III)
Minimum Line items in Balance Sheet (at least this much is required)
◘◘ Following are the minimum items paid:
(a) Property, plant and equipment;
(b) Investment property;
(c) Intangible assets;
(d) Financial assets (excluding amounts shown under (e),(h) and (i));
(e) Investments accounted for using the equity method;
(f) Biological assets;
(g) Inventories;
(h) Trade and other receivables;
(i) Cash and cash equivalents;
(j) The total of assets classified as held for sale and assets included in disposal groups classified as
held for sale in accordance with Ind AS 105 Non-current Assets Held for Sale and Discontinued
Operations;
(k) Trade and other payables;
(l) Provisions;
(m) Financial liabilities (excluding amounts shown under (k) and (l));
(n) Liabilities and assets for current tax, as defined in Ind AS 12 Income Taxes;
(o) Deferred tax liabilities and deferred tax assets, as defined in Ind AS 12;
(p) Liabilities included in disposal groups classified as held for sale in accordance with Ind AS 105;
(q) Non-controlling interests, presented within equity; and
(r) Issued capital and reserves attributable to owners of the parent.
◘◘ Shall present additional line items if relevant.
◘◘ If current and non-current classification exists, deferred tax assets/liabilities should not be shown
under Current.
◘◘ Order or format is not mentioned by Ind AS-1.
Classification of Current Assets (same definition is given by Schedule III)

(a)
It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle;
(b)
It holds the asset primarily for the purpose of trading;
(c)
It expects to realize the asset within twelve months after the reporting period; or
(d)
The asset is cash or a cash equivalent (as defined in Ind AS 7 cash flow statement) unless the asset
is restricted from being exchanged or used to settle a liability for at least twelve months after the
reporting period.
All other assets are non-current assets
Classification of Current Liabilities (same definition is given by Schedule III)

It expects to settle the liability in its normal operating cycle;
(a) Liability primarily for the purpose of trading; (Derivative unfavorable contracts)
(b) The liability is due to be settled within twelve months after the reporting period; or
(c) It does not have an unconditional right to defer settlement of the liability for at least twelve months
after the reporting period. Terms of a liability that could, at the option of the counterparty, result in
its settlement by the issue of equity instruments do not affect its classification.
All other liabilities are non-current liabilities.
THINGS TO REMEMBER
Some current liabilities, such as trade payables and some accruals for employee and other operating costs, are
part of the working capital used in the entity’s normal operating cycle. Even if they are settled after more than
12 months, they are classified as current.
Example: If Coprico Limited has an operating cycle of 24 months. On 31/3/2016 even if the amount is
payable on account of trade payables after 12 months from the reporting date but within operating cycle is
a Current Liability.
Items to be segregated in Balance Sheet or Notes

These segregations are almost covered by Schedule III very well
Example: Items of property, plant and equipment are disaggregated into classes in accordance with Ind
AS 16; Receivables are disaggregated into amounts receivable from trade customers, receivables from
related parties, prepayments and other amounts; Inventories are disaggregated, in accordance with Ind AS
2 Inventories, into classifications such as merchandise, production supplies, materials, work in progress
and finished goods; etc…..
Disclosures for Share Capital & Reserves

Again these segregations / disclosures are almost covered by Schedule III very well
Examle: For each class of share capital:

◘◘ the number of shares authorized; the number of shares issued and fully paid, and issued but not
fully paid;
◘◘ par value per share, or that the shares have no par value;
◘◘ a reconciliation of the number of shares outstanding at the beginning and at the end of the period;
etc.
Please refer Schedule III (Revised) as per Companies Act 2013.

Statement of Profit and Loss
Controlling Int.
P&L Non-Controlling Int.
Statement of P & L Other Comprehensive Income Controlling Int.
Non-Controlling Int.
Total Comprehensive Inc.
In addition to other line items, P& L Section should contain:

◘◘ Revenue;
◘◘ Finance costs;
◘◘ Share of the profit or loss of associates and joint ventures accounted for using the equity method;
◘◘ Tax expense
◘◘ A single amount for the total of discontinued operations
(these segregations are almost covered by Schedule III very well)
DO YOU KNOW
Balance Sheet is known as Statement of Financial Position (SOFP) and P/L is known as Statement of Compre-
hensive Income (SOCI) under IFRS.
Other Comprehensive Income (OCI)

Information to be presented in OCI Section
◘◘ OCI including share of the other comprehensive income of associates and joint ventures accounted for
using the equity method). (a) Will not be reclassified subsequently to profit or loss; and (b) Will be
reclassified subsequently to profit or loss when specific conditions are met.
◘◘ An entity should not show any items as extraordinary. (It is strictly prohibited)
◘◘ All items of income or expense should be routed through P & L unless an Ind AS permits otherwise.
◘◘ Disclose the tax effect of each component of OCI in notes or P & L.
◘◘ Each item can be disclosed as Net off tax effects.
Few instances of OCI

◘◘ Fair value changes on revaluation of property, plant and equipment and intangible assets as per Ind
AS 16, Property, Plant and Equipment and Ind AS 38, Intangible Assets.
◘◘ Re-measurements of employee defined benefit plans, e.g., actuarial gains and losses, as per Ind AS 19,
Employee Benefits.
◘◘ Gains and losses arising from translating the financial statements of a foreign operation as per Ind AS
21, Effects of Changes in Foreign Exchange Rates (known as translation difference).
◘◘ Gains and losses from investments in debt / equity instruments designated at fair value through other
comprehensive income as per IND AS 109, Financial Instruments (FVTOCI).
◘◘ Gains and losses on account of cash flow hedge.
Reclassification adjustments
Can be recycled to P&L Cannot be recycled to P&L
yy Disposal of a foreign operation (see Ind AS 21), yy Surplus recognized in accordance with Ind AS 16 Ind
yy De-recognition of available-for-sale financial assets AS 38 (Intangible Assets) or
(see Ind AS 39) yy Actuarial gains and losses on defined benefit plans
yy Hedged forecast transaction affects profit or loss (see recognized in accordance with paragraphs 92 and
paragraph 100 of Ind AS 39 in relation to cash flow 129A of Ind AS 19
hedges). yy Gains and losses from investments in equity instru-
ments designated at fair value through other
comprehensive income as per Ind AS 109, Financial
Instruments.
yy For financial liabilities designated at fair value
through profit or loss, the amount of the change in
fair value attributable to changes in the entity’s own
credit risk as per Ind AS 109, Financial Instruments
Information to be presented in P & L (Exceptional Items in AS – 5)

◘◘ When items of income or expense are material, an entity shall disclose their nature and amount
separately.
◘◘ Circumstances that would give rise to the separate disclosure of items of income and expense include:
(a) Write-downs of inventories to net realizable value or of property, plant and equipment to
recoverable amount, as well as reversals of such write-downs;
(b) Restructurings of the activities of an entity and reversals of any provisions for the costs of
restructuring;
(c) Disposals of items of property, plant and equipment;
(d) Disposals of investments;
(e) Discontinued operations;
(f) Litigation settlements; and
(g) Other reversals of provisions.
◘◘ An entity shall present an analysis of expenses recognized in profit or loss using a classification based
on the nature of expense method.
Statement of Changes in Equity

◘◘ Total comprehensive income for the period, showing separately the total amounts attributable to
owners of the parent and to non-controlling interests;
◘◘ For each component of equity, the effects of retrospective application or retrospective restatement
recognized in accordance with Ind AS 8;
◘◘ For each component of equity, a reconciliation between the carrying amount at the beginning and the
end of the period, separately disclosing each changes resulting from:
(a) Profit or Loss;
(b) Each item of other comprehensive income;
(c) Transactions with owners in their capacity as owners, showing separately contributions by and
distributions to owners and changes in ownership interests in subsidiaries that do not result in
a loss of control; and
(d) Any item recognized directly in equity such as amount recognized directly in equity as capital
reserve with paragraph 36A of Ind AS 103.
Notes to Financial Statements

Generally presented in the following order:
◘◘ statement of compliance with Ind ASs
◘◘ summary of significant accounting policies applied
◘◘ supporting information for items presented in the BS, SOCE, P&L in order of presentation and appear-
ance in line item order
◘◘ Other disclosures, including:
(a) Contingent liabilities (Ind AS 37) and unrecognized contractual commitments, and
(b) Non-financial disclosures, e.g. the entity’s financial risk management objectives and policies
(see Ind AS 107).
Disclosure of Significant accounting policies (Same as AS-1)

An entity shall disclose in the summary of significant accounting policies.
Distinguish between
AS-1 Ind AS-1
No format of Financial Statement is provided by AS-1. Ind AS-1 requires Current / Non – Current classification
regarding assets and liabilities.
Extra – ordinary activity is defined in AS-5 and requires a Extra – ordinary activity is prohibited.
separate disclosures.
No such mention (management judgments and Management assumptions and judgments are required.
assumptions about a/c policies)
Current year accounts and comparative accounts is B/S and P/L should be on comparative basis. In some cases
necessary. 3 B/S are required to be submitted.
No statement of changes in equity is mentioned. Statement of changes in equity is yet another new addition.
Single format of Revenue is implemented. In fact no Total P/L Statement comprises of Normal P/L and OCI
mention about the content of Revenue Statement or B/S is
provided by AS-1.
No such mention about reclassification of loan in case of Long term loans breach is mentioned by Ind AS-1. (refer
breach is mentioned. theory below).
Comparison of Ind AS-1 with IAS -1

(a) IAS 1 has the option either to follow the single statement approach or to follow the two statement
approach. Ind AS 1 allows only the single statement approach (i.e. P/L and OCI is within same
single statement.).
(b) IAS 1 requires preparation of a Statement of Changes in Equity as a separate statement. Ind AS 1
requires the Statement of Changes in Equity to be shown as a part of the balance sheet (refer Schedule III).
(d) Paragraph 8 of IAS 1 gives the option to individual entities to follow different terminology for the
titles of financial statements. Ind AS 1 is changed to remove alternatives by giving one terminology
to be used by all entities.
(e) As per IAS -1 if any breach regarding repayment of loan is prevailing before B/S date (such loan
is treated as non – current) and if the breach is rectified after B/S date then it is reclassified as a
current liability. As per Ind AS -1 if any breach regarding repayment of loan is prevailing before B/S
date and if the breach is rectified after B/S date then it is still treated as a non – current liability.
In case of Indian Banking system the procedure regarding the loan disbursement, submitting
of insurance details will take a long time. Hence better it is proper to treat it a non – current
obligation.
(f) IAS 1 permits the periodicity, for example, of 52 weeks for preparation of financial statements. As
Ind AS 1 does not permit it, the same is deleted.
(g) IAS 1 requires an entity to present an analysis of expenses recognized in profit or loss using a
classification based on either their nature or their function viz: Production costs, Selling expenses,
Administration expenses. Ind AS 1 requires only nature-wise classification of expenses (please
refer Schedule III).
AS – FORMAT OF FINANCIAL STATEMENT

Problem1: From the following information, prepare Statement of Changes in Equity of Ghaman LTD. for the
period ended 31st March, 2017:
Share Capital in the beginning ₹ 200 crores
Retained Earnings in the beginning ₹ 400 crores
Securities Premium in the beginning ₹ 200 crores
Capital Redemption Reserve in the beginning ₹ 200 crores
Revaluation Reserve in the beginning ₹ 200 crores
Prior period errors resulting in increase in profits ₹ 20 crores
Changes in Accounting Policy resulting in increase in profits ₹ 40 crores
Net profit for the period ₹ 80 crores
Revaluation Gain on Non-current Fixed Assets ₹ 40 crores
Fair value changes of financial assets held as available for sale ₹ 80 crores
Effective portion of upward change in fair value of hedging instruments
in cash flow hedges ₹ 20 crores
Actuarial gain on defined benefit plans ₹ 20 crores
Dividends payments ₹ 20 crores
Issue of 2 crore new shares of ₹ 10 each at ₹ 100 each
Buy back of 80 lacs shares of ₹ 10 each at ₹ 50 each out of Securities Premium
Issue of bonus shares out of capital redemption reserve ₹180 crores
Solution: Statement of Changes in Equity of Ghaman Ltd. for the period ended 31st March, 2017
Particulars Share Reserves & Surplus Total
Capital Retained Securities Capital Revalu- Equity
Earnings Premium Red. ation
Reserve Reserve
A. Balance in the beginning 200 400 200 200 200 1200
B. Corrections of prior period errors 20 20
C. Changes in Accounting Policy 40 40
D. Re-stated Bal. in the beg. (A+B+C) 200 460 200 200 200 1260
E. Net Income for the period 80 80
F. Effect of Revaluation
(i) Revaluation of Non-Current Fixed
Assets 40 40
(ii) Change in re-measuring of financial
assets held as available for sale 80 80
(iii) Effective portion of change in fair
value of hedging instruments in cash
flow hedges 20
20
(iv) Actuarial gains and losses on defined
benefit plans 20 20
Total (F) 0 0 0 0 160 160
G. Transaction with Shareholders
(i) Dividends (20) (20)
(ii) Issue of New Shares 20 180 200
(iii) Buy Back of Shares (8) (8) (32) 8 (40)
(iv) Issue of Bonus Shares 180 (180) 0
Total (G) 192 (28) 148 (172) 0 140
H. Balance at the end (D + E + F + G) 392 512 348 28 360 1640
Problem 2: ML Ltd presents you the summarized trail balance for the year 31/3/2015. (₹ crores)
Debit item Amount (`) Credit item Amount (`)
Employee cost 50.45 Share Capital (₹1) 100.00
Depreciation 46.30 P/L 1/4/2014 10.00
Cost of materials consumed 110.44 Securities Premium 16.41
Other expenses 14.33 Revaluation reserve 7.33
Current assets 130.42 Current liabilities 75.64
Fixed Assets 445.60 Debentures 10.00
Sales and Services 578.16
797.54 797.54
Adjustments:
1) Employee cost includes ₹ 2.30 on account of actuarial loss.
2) On 31/3 fixed assets were upward revalued by 20% (not yet accounted)
3) During the year Equity shares were raised 10 crores shares @ premium of ₹1.
4) Dividend declared 12% (not yet accounted).

Draw P/L including OCI, Statement of changes in Equity and Balance Sheet as per Ind AS – 1.
Solution: P/L as on 31/3/2015
Particulars ` in crores
Sales and Services 578.16
Expenditure:
Employee cost (excluding actuarial loss) (48.15)
Depreciation (46.30)
Cost of materials consumed (110.44)
Other expenses (14.33)
NP from ordinary activities………..(a) 358.94
Other Comprehensive Income
Revaluation reserve 89.12
Actuarial loss (2.30)
Total………………………..(b) 86.82
Net Profit c/f……………(a+b) 445.76
Share of Non - Controlling Interest is not applicable.

Statement of changes in Equity
Particulars Share Capital Securities Revaluation Revenue Total
Premium Reserves Reserves
As on 1/4/2014 90 6.41 7.33 10 113.74
Fresh issue 10 10 20
Addition 89.12 356.64 445.76
Less: Dividends (12) (12)
Net 100 16.41 96.45 354.64 567.50
Balance Sheet as on 31/3/2015

Amount (`) Amount (`)
Share Capital (₹1) 100.00 Reserves / Surplus
Reserves and Surplus 467.50 P/L balance 354.64
Securities Premium 16.41
Debentures 10.00 Revaluation reserve 96.45
Current liabilities 75.64 Total 467.50
Provisions – Dividend 12.00
Total (E+L) = 665.14
Fixed Assets 534.72 (445.60+20% of 445.60)
Current Assets 130.42
665.14
Format of Financial Statement for the year
Revenue Statement
Sales and Services XXX
Less: Excise duty (XXX)
Net Sales XXX
Other operating revenue XXX
Other income XXX
Total income: XXX
Expenditure:
Raw Materials consumed XXX
Changes in stock XXX
Depreciation and amortization XXX
Employee cost XXX
Finance expenses XXX
Other expenses XXX
Total expenditure XXX
Net profit / loss from ordinary activities…a XXX
+/- Exceptional items XXX
+/- Extraordinary items XXX
Net profit from continuing operations XXX
Less: Tax expenses (XXX)
Net profit after tax from continuing operations XXX
Net profit / loss after tax from discontinuing operations…b XXX
Total net profit / loss (a+b) XXX
Other Comprehensive Income (Oci)
Revaluation Reserves less tax XXX
FVTOCI changes less tax XXX
Re-estimation of actuarial gain / loss less tax XXX
Cash flow hedge reserve less tax XXX
Total net OCI profit / loss: XXX
Equity Retained Securities OCI – OCI Total

Share earnings Premium FVTOCI -Revaluation
Capital Reserves
Opening balance XX XX XX XX XX XX
Changes in A/c policy XX XX XX XX XX XX
Prior period item XX XX XX XX XX XX
Restated balance XX XX XX XX XX XX
Changes in equity current year

(-) Dividends - (XXX) - - - XX
Issue of right shares XXX - XXX - - XX
(-) Buy back (XXX) - (XXX) - - XX
Net P/L for the year - XXX - - - XX
OCI for the year - - - XXX XXX XX
Closing Balance c/f XXX XXX XXX XXX XXX XX
CHAPTER 2
IND AS 2: INVENTORIES
Chapter Outline
vv Some important points on Ind AS-2
vv Explanation with illustration
AS-2 Ind AS – 2
Considers only NRV Considers Fair Value also
Does not consider defer payment concept. Defer payment includes an element of financing.
AS – 2 does not prescribe the recognition of expense. Recognition of expense covered.
AS – 2 does not allow reversal of inventory loss. But in Reversal of inventory loss is allowed both in annual as well
Interim financial statements it is allowed. as interim financial statement, (which is restricted to the
original cost).
Accounting treatment of inventories not covered. Inventories used to manufacture fixed asset is capitalized.
Inventories produced for sale charged to income account.
Commodity-brokers are scoped out completely. Commodity-brokers are scoped out but the valuation of
inventory is discussed in terms of guidance.
AS-2 removes WIP of Service Contracts from its scope. Ind AS-2 cover WIP of Service Contracts held by them.
Disclosures restricted to valuation principles only. Disclosures are enlisted in detail other than valuation :
ww Amount of inventory recognized as expense during
the period Amount of any write-down of inventories
recognized as an expense in the period
ww Amount of any reversal of a write-down to net real-
izable value and the circumstances that led to such
reversal
ww Circumstances requiring a reversal of the write-down
ww Carrying amount of inventories pledged as security.
Some important points on Ind AS-2

(1) Distinguish between NRV and Fair Value
Net Realisable Value Fair Value
NRV is the estimated selling price in the ordinary course of Fair Value is the price that would be received to sell an asset
business less estimated cost to sell the asset less estimated or even to pay a liability
cost to complete the asset.
NRV is after deducting expenses FV is before deducting expenses
NRV is entity specific (differs from firm to firm) FV is in general (market oriented)
NRV is used by producers for valuing stock FV is used by commodity brokers / traders
NRV is defined only by AS-2 FV is comprehensively defined and explained by Ind AS-113s.
(2) Recognition of Expense

ww When inventory is sold, the carrying amount of inventory should be recognized as an expense
when the related revenue is recognized. Here the inventory cost is charged to P/L as Cost of
Production but in case of India we don’t have the P/L classification as per function (also refer
format of schedule III)
ww Moreover, the amount of any inventory written down to net realizable value is recognized as an
expense.
ww The amount of any reversal of write-down of inventory should be credited to profit / loss account.
Illustration 1: Suppose Nest (I) Ltd is in snacks business (2 mins ready snacks). In the year 2015-16 say
March due to public agitation the goods were abandoned from the market. Out of the inventories worth ₹ 6
crores the company has to written off 80% of stock worth ₹ 5 crores. Inventory worth ₹ 1 crore was badly
damaged due to some storage problems and was destroyed.
Subsequently the restrictions were withdrawn in May 2016. Nest (I) Ltd can now write back at least 60% of
the loss out of the unsold goods. Explain the impact on the P/L as per Ind AS – 2.
Solution: Year 2015-16: Inventory written off = Written off + Inventory destroyed = 1+4 = ₹ 5 crores. Year
2016-17: Inventory written back (credited to P/L) = 4 x 0.6 = ₹ 2.4 crores.
(3) Something on Scope
This Standard applies to all inventories other than:
◘◘ Work in progress under construction contracts and directly related service contracts (Ind AS 11,
Construction Contracts)
◘◘ Financial instruments (Ind AS-109)
◘◘ Producers of Agricultural inventories / Biological Assets and Agricultural Produce at the point of
harvest (Ind AS – 41).
(4) Guidance on Commodity brokers / Agri produce
◘◘ Agricultural produce after they are harvested and mineral ores are extracted such inventories are
measured at Net Realizable Value. Changes in the value are recognized in the profit or loss in the
period of change. The practice of valuing at NRV (including profit) is very common in such industry.
◘◘ Commodity brokers-traders too measures their inventories at (Fair Value less Cost to sell).
◘◘ When such inventories are measured at fair value less cost to sell, the changes in fair valueless costs
to sell are recognized as profit or loss in the period of change.
In the above cases the principles of Ind AS-2 is not applicable to these industries as they don’t adopt
Cost or NRV whichever is less.
IND AS 2: INVENTORIES 14
Explanation with illustration

Illustration:
Agricultural produce sugarcane not yet harvested valued at ₹ 6,00,000. Cost incurred ₹ 4,00,000. Here we
apply Ind AS-41 because the agri produce is not yet harvested.
But when the goods are harvested (plucked or detached with the plant) the sugarcane is an inventory, but
not valued in accordance with Ind AS-2 i.e. cost or NRV whichever is less is not adopted. It is valued at NRV
(including profits). Such practice is allowed in such industry. Similarly Commodity brokers do not follow the
principle of cost or NRV whichever is less. They value inventories at fair value less cost to sell. This is because
goods unsold in such industries carry high degree of certainty of being sold at Fair Value (guaranteed sale).
Sometimes they have government assurance under a forward contract. In short these industries don’t apply
cost or NRV whichever is less.
Understand the following and improve upon the knowledge

(5) Inventories of Service Providers
Service providers also keep some inventories for their services to render. For ex: A Coaching classes
keep stationery. Saloon and Spa keep consumables (lotion, cosmetics, etc). If the inventories are
held for consumption then they are valued at cost. If held for sale / resale then value at NRV or Cost
whichever is less.
(6) Inventory Purchased on Deferred Settlement Terms
When inventories are purchased on deferred settlement terms, such arrangements in reality contain
a financing element. That portion of the price that can be attributable to extended settlement terms,
the difference between the purchase price for normal credit terms and the amount paid, is recognized
as interest expense over the period of the financing arrangement
Problem 1: Magogama Limited purchased inventory of ₹ 45,00,000 on 1/4/2016. The purchase cost
includes implicit finance cost. The amount will be paid at the end of 2 years. The cost of financing is 8%. Pass
Journals for 2 years as per Ind AS-2.
Solution: Journal entries: (2 years) ` 45,00,000 / (1+0.08)2
1/4/2016
Purchase A/C Dr 38,58,025*
To Trade payables A/C 38,58,025
31/3/2017
3,08,642
Finance costs A/C (8% x 3858025) Dr
3,08,642
To Trade payables A/C
31/3/2018
Finance costs A/C Dr 3,33,333
To Trade payables A/C 3,33,333
Trade payables A/C Dr

45,00,000
To Cash
45,00,000
CHAPTER 3
IND AS 7: CASH FLOW
STATEMENTS
Chapter Outline
vv Differences between Ind AS-7 and IAS-7
vv Some important points on IAS – 7
Ind AS-7 AS-3

Bank overdrafts that are repayable on demand and form AS-3 is silent on this aspect
an integral part of an entity’s cash management may be
included as a component of cash equivalents.
Ind AS – 7 also deals with presentation and preparation of AS-3 is silent on this aspect
consolidated CFS.
Ind AS – 7 encourages Reporting of Cash flows Segment – No mention.
Wise.
No separate title known as Extra Ordinary activity is CFOA, CFIA, CFFA includes Extra Ordinary activities if any.
permitted.
Ind AS -7 covers classification of derivatives like forwards, No such guidance provided.
futures, options, swaps in Cash Flow Statement.
Assets held for rentals and its subsequent sale is treated as Assets held for rentals and its subsequent sale is treated as
operating activity. investing activity.
IT provides guidance on effects of: No such guidance
Undistributed profits of associates;
Cash flows of a foreign subsidiary should be converted
using average rate;
Cash flows arising from changes in ownership interests in a
subsidiary that do not result in a loss of control are classified
as CFFA.
THINGS TO REMEMBER
CFOA = Cash From Operating Activities, CFIA = Cash From Investments Activities, CFFA = Cash From Financing Ac-
tivities.

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

(1) Bank O/Ds as Cash Equivalents
As per Ind AS – 7 Amounts due to a bank are generally considered to be financing activities. However,
in certain countries, bank overdrafts that are repayable on demand and form an integral part of an
entity’s cash management may be included as a component of cash equivalents.
(2) Derivatives Contracts
Futures contracts, Forward contracts, Option contracts, and Swap contracts:
As per Ind AS - 7 cash flows from futures contracts, forward contracts, option contracts, and swap
contracts are normally classified as CFIA.
Example: Profits from Arbitrage process.
But if such contracts are held for trading purposes then they are covered as CFOA.
Example: A speculator regularly engaged in buying / selling futures to earn profits.
When the payments or receipts of a derivative item is to support borrowings For ex: Interest rates
swaps entered for loan taken to finance a business, then CF from such derivatives are financing
activities.
When a contract is accounted for as a hedge of an identifiable position, the cash flows of the contract
are classified in the same manner as the cash flows of the position being hedged.
Example: If Cuba Ltd has invested in equity shares of Cipla Ltd held for FVTOCI (Ind AS – 109). To
protect against downfall share prices, Cuba Ltd took PUT OPTIONS. In this case cash flows from PUT
OPTIONS will be classified under CFIA.
Copper futures purchased for copper as raw materials to be purchased on a later date. Copper is an
inventory and an operating activity, so also the futures will also be classified as an operating activity.
(3) Assets held for Rentals:
Assets held for rentals and it is sold out is CFOA. Whether the assets are hired on rental basis or to
earn rental incomes all such cash flows are CFOA. Even the sale of such an asset is treated as CFOA.
But as per AS-3 such cash flows are treated as CFIA.
PROBLEMS & SOLUTIONS
Problem 1: Identify whether the following is an element of Cash and Cash Equivalent as per Ind AS - 7:
Case 1: Delta Ltd has made a term deposit for 1 year for ₹ 30,00,000. As on 31/3/2016 the TD has remaining
maturity of 3 months only.
Case 2: Gamma Inc has invested in equity shares only for 15 days $ 4 millions.
Case 3: Beta Ltd has invested Yens 50 millions in Yankee lulu Bank @9% for a period of 3 months
The investor has a right to withdraw the amount by giving a notice. Pre mature withdrawal attracts penalty
whereby 50% interest should be foregone.
Case 4: Cash kept for investments purpose in money market MFs.
Case 5: Thetha Ltd has invested in 8% Preference Share for 1 month.
Case 6: Mangolisa Ltd has post dated cheques worth ₹ 7,00,000.
IND AS 7: CASH FLOW STATEMENTS 17
Solution: Cash and Cash Equivalent (C & CE) features:

(i) Short term liquid instruments
(ii) It carries negligible risk
(iii) Its maturity should not exceed 3 months,
Case 1: Not a C & CE as the original maturity of TD is more than 3 months.
Case 2: Not a C & CE as equity instruments carry risk
Case 3: Substantial loss of money i.e. 50% is too much risk hence not a C & CE.
Case 4: Yes (assumed all conditions are being satisfied).
Case 5: Yes preference share investment is a cash equivalent .
Case 6: No. It is not even a recognized transaction.
Problem 2: Mongolia Coppers Ltd purchased February 2018 copper futures to hedge against the rising
prices of copper which will be purchased in the month of February. Today is 15th December 2017. Mongolio
paid 10% margin money today to enter the contract. Futures will be net settled by cash. Till the settlement
date mark to market works out to be ₹ 60,000 loss. Comment on various cash flows on account of copper
inventory and its futures till settlement date.
Solution:
As per Ind AS – 7: When a contract is accounted for as a hedge of an identifiable position, the cash flows of
the contract are classified in the same manner as the cash flows of the position being hedged.
Initial margins: CFOA (OutfIows)
Mark to Market loss: CFOA (Outflows) from December - February.
Purchase of inventory: CFOA.
CHAPTER 4
IND AS 8: CHANGES IN A/C
ESTIMATES, POLICIES, ERRORS
Chapter Outline
vv Differences between Ind AS- 8
and IAS-8 No Difference.
Ind AS-8 AS-5

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

(1) Applying the changes in Accounting Policies: (For meaning of AP refer AS-1)
As per Ind AS - 8 a change in accounting policy required by a Standard or Interpretation shall be
applied in accordance with the transitional provisions therein. (For ex: New method of depreciation
as per New Schedule II requires transitional provision. Remember it is not retrospective effect).
If a Standard or Interpretation contains no transitional provisions or if an accounting policy is
changed voluntarily, the change shall be applied retrospectively.
The practical impact of this is that corresponding amounts (or “comparatives”) presented in financial
statements must be restated as if the new policy had always been applied. The impact of the new policy on
the retained earnings prior to the earliest period presented should be adjusted against the opening balance
of retained earnings.
Retrospective application of a change in accounting policy need not be made if it is impracticable to determine
either the period-specific effects or the cumulative effect of the change.
(2) Applying the changes in Accounting Estimates: (For meaning and other details you can refer AS-5)
As per Ind AS-8 Change in Accounting Estimate will be prospectively adjusted. Change in accounting
estimates need not be made if it is impracticable to determine the specific effect.
(3) Applying the changes in Errors: (For meaning and other details you can refer AS-5)
Errors even include frauds in Ind AS – 8. Errors can arise in recognition, measurement, presentation,
or disclosure of items in financial statements.
Discovery of material errors relating to prior periods shall be corrected by restating comparative
figures in the financial statements for the year in which the error is discovered, unless it is
“impracticable” to do so. Again, the strict definition of “impracticable” (as explained above) applies.
Even calculation of Basic and Diluted EPS should change.
PROBLEMS & SOLUTION
Problem 1: Fultu Tides Inc. changed its accounting policy in 2016 with respect to the valuation of inventories.
Up to 2015, inventories were valued using a weighted average cost (WAC) method. In 2016 the method was
changed to first-in-first-out (FIFO), as it was considered to more accurately reflect the usage and flow of
inventories in the economic cycle. The impact on inventory valuation was determined to be
At December 31, 2014: an increase of $ 10,000
The income statements prior to adjustment are
Particulars 2016 2015

Sales and Services $ 2,50,000 $ 2,00,000
Cost of sales 1,00,000 80,000

Administration Costs 60,000 50,000
Selling and distribution costs 25,000 15,000
Net profit 65,000 55,000
IND AS 8: CHANGES IN A/C ESTIMATES, POLICIES, ERRORS 20
Required: Present the change in accounting policy in the Income Statement and the Statement of Changes in
Equity in accordance with requirements of Ind AS - 8.
Solution: The income statements after adjustment would be:
Fultu Tides Inc.
Income Statement
(For the year ended December 31, 2016)
Particulars 2016 ($) 2015 ($)
(restated)
Sales and Services 2,50,000 2,00,000
Cost of sales 95,000 75,000

Administration Costs 60,000 50,000
Selling and distribution costs 25,000 15,000
Net profit 70,000 60,000
Explanation
In each year, Cost of Sales will be reduced by $ 5,000, the net impact on the opening and closing inventories
of change in accounting policy.
The impact on the “retained earnings” included in the “statement of changes in equity” would be as follows
(the shaded figures represent the situation if there has been no change in accounting policy).
F T Inc.
Statement of changes in Equity (Retained earnings columns only)
(For the year ended December 31, 2016)
Particulars Retained Retained

earnings earnings
On 1/1/2015 as originally stated 4,00,000 4,00,000
Change in a/c policy valuation of inventory 10,000 ---
On 1/1/2015 as restated 4,10,000
Net profit for the year as restated 60,000 55,000
On 31/12/2015 4,70,000 4,55,000
Net profit for the year 70,000 65,000
On 31/12/2016 5,40,000 5,20,000
Problem 2 : Effect of change in accounting estimates

Zuhum Fruits Inc. purchased an Asset @ € 4,60,000 on 1/1/2014. The estimated life of the asset as per the
technicians estimated to be 12 years. The Salvage value estimated to be € 10000. As on 2017 total life of the
asset is revised to 10 years. Salvage is also revised to € 9,000. Compute the effect of change in a/c estimates
on the profit / loss of the year 2017.
Assuem SLM method.
Solution:
Depreciation: (4,60,000 – 10,000) / 12 = € 37,500.
Carrying amount of the asset as on 31/12/2016: 4,60,000 – 37,500 x 3 = € 3,47,500.
For the year 2017
Prospective effect:
Depreciation for 2017 = ( 3,47,500 - 9,000 ) / (10-3) = 3,38,500 / 7 = € 48,357.
Change in depreciation = 48,357-37,500 = € 10857 (extra depreciation).
Problem 3: Effect of errors

Promy Chemicals Ltd provides you the following information for the year ended:
Particulars 31/3/2017 31/3/2016 The following information is relevant:

Share Capital 4,00,000 4,00,000 During the year 2015-16 a piece of land is purchased.
The company has capitalized an expenditure of ₹
Surplus balance 40,000 which is now treated as revenue. It was wrongly
Opening balance 7,00,000 4,00,000 capitalized. Ignore tax.
Net profit 2,00,000 3,00,000 What will the effect of the prior period item both as per
Ind AS-8 and AS-5?
Liabilities 2,00,000 1,90,000
15,00,000 12,90,000
Fixed Assets 12,00,000 10,00,000
Current Assets 3,00,000 2,90,000
15,00,000 12,90,000
Solution: As per Ind AS – 8 As per AS- 5
Particulars 31/3/2017 31/3/2016 Particulars 31/3/2017 31/3/2016

Share Capital 4,00,000 4,00,000 Sales and Services xxxxx Xxxxx
Surplus balance Expenses xxxxx Xxxxx
Opening balance 6,60,000 4,00,000 Materials consumed xxxxx Xxxxx
Net profit 2,00,000 2,60,000 Depreciation
Other expenses(PPI)
xxxxx xxxxx
Liabilities 2,00,000 1,90,000 Net Profit (40000) Xxxxx
14,60,000 12,50,000 xxxxx Xxxxx
Fixed Assets 11,60,000 9,60,000
Current Assets 3,00,000 2,90,000
14,60,000 12,50,000
Imp points
In Ind AS-8 errors have retrospectives effect. Can you see that the last year accounts have been revised.
Adjustment in the last year profit should be done, as the mistake relates to last year.
In case of AS-5 last years a/cs remain same. Current year (31/3/2017) P/L will be reduced by ₹ 40000.
Simultaneously Fixed Asset of current year will be reduced by ₹ 40000.
Entry: P/L A/C Dr ₹ 40000
To Land A/C ₹ 40000
In addition to the above adjustment, the company is also required to make a disclosure in the financial
statements about the prior period item.
◘◘ Depreciation effect is ignored because land is not depreciable asset.
CHAPTER 5
IND AS 10: EVENTS AFTER THE
BALANCE SHEET DATE
Chapter Outline
vv Some examples of non - adjusting events include
Ind AS-10 AS-4

Non Adjusting events are neither recorded nor disclosed in Even in AS – 4 Non Adjusting events are not recorded but
financial statements. disclosed in approving authority report and not financial
statements.
Proposed Dividend is strictly not allowed to be recorded for Proposed Dividend is covered by Schedule VI (Old) i.e. it is
the reporting date as per Ind AS – 10 an adjusting event. AS – 4 has not undergone any revision,
hence provisions of Schedule III new Companies Act is not
being incorporated.
Reason for going concern ability being invalid is to No reason for going concern ability being invalid is to
be disclosed. For: Due to abolishment of products by be disclosed. Adjustments towards assets and liabilities
government the company is expected to close down the required. A fact about the going concern ability no more
business. exists is to be disclosed.
Special Case of breach: No such provision.
Conditions:
(i) Loan arrangement
(ii) breach of payment
(iii) lender waives the breach before approval of
accounts.
(iv) It’s a non – adjusting event. Also refer Ind AS-1 for
better understandings.

As per Ind AS–10: Special Case of breach:
Conditions:
(i) Loan arrangement
(ii) breach of payment
(iii) liability is payable on reporting date
(iv) lender waives the breach before approval of accounts. In case of IAS – 10 it is treated as non – adjusting
events.
Some examples of non - adjusting events include

◘◘ Declaration of an equity dividend
◘◘ Decline in the market value of an investment after the balance sheet date
◘◘ Entering into major purchase commitments in the form of issuing guarantees after the balance sheet
date
◘◘ Classification of assets as held for sale under IFRS 5 and the purchase, disposal, or expropriation of
assets after the balance sheet date
◘◘ Commencing a lawsuit relating to events that occurred after the balance sheet date
Problem 1: Revipentu Corp. carries its inventory at the lower of cost and net realizable value. At March
31, 2015, the cost of inventory, determined under the first-in, first-out (FIFO) method, as reported in its
financial statements for the year then ended, was ₹ 10 million. Due to severe recession and other negative
economic trends in the market from last 6 months, the inventory could not be sold during the entire month
of April 2015. On May 02, 2015, Revipentu Corp. entered into an agreement to sell the entire inventory to a
competitor for ₹ 6 million.
What will be your answer if: Revipentu Corp has not manufactured goods by 31/3/2015.
Required: Presuming the financial statements were authorized for issuance on 15 th June 2015 should
Revipentu Corp. recognize a write-down of ₹4 million in the financial statements for the year ended March
31, 2015?
Solution:
Yes, Revipentu Corp. should recognize a write-down of ₹4 million in the financial statements for the year
ended March 31, 2015.
If Revipentu Corp has not manufactured goods by 31/3/2015 then no provision required.
CHAPTER 6
IND AS 12: TAXES ON INCOME
Chapter Outline
vv Consolidated Financial Statements
Ind AS-12 AS-22

Ind AS – 12 follows Balance Sheet approach for calculating AS - 22 follows Income approach for calculating Deferred
Deferred Tax. Tax.
Treatment of Current Tax and Deferred Tax: (i) Income AS-22 does not deal with so many treatments. AS-22
Statement, (ii) Equity, (iii) Other Comprehensive Income, transfers Current Tax and Deferred Tax to P/L Account.
(iv) Sometimes it is an adjustment to Goodwill.
DTA should be disclosed under Non – Current Assets as a No disclosure provisions provided by AS-22 regarding DTA /
separate line item. DTL should be disclosed under Non – DTL. Presentation principle is covered by Schedule III (refer
Current Liabilities as a separate line item. schedule iii)
It considers Deferred tax on Translation of foreign operation, As AS-22 follows income approach hence such items which
unrealized gain / loss on stock in CFS, Undistributed Profits hits only the B/S is not covered.
at CFS, and Revaluation of Assets.
No such guidance provided. AS - 22 provides guidance on Virtually Certainty, Tax holidays,
115JB through accounting Standard Interpretations. Such
guidance is necessary for Indian tax regulations.
Ind AS-12 defines Temporary Differences. It defines Timing Differences.

Definitions
◘◘ Accounting Profit: Profits as per Co Act / Accounting Std.’s (same as AS-22)
◘◘ Taxable Profit: Income submitted to ITO officer as per the tax laws and rules. (same as AS-22)
◘◘ Tax expense: It’s the summation of Current and Deferred tax (same as AS-22)
◘◘ Current tax: The amount of income taxes payable (recoverable) in respect of the taxable profit (tax
loss) for a period. If the income is positive we have to pay taxes. But if the entity incurs a loss then
taxes are c/f in India. But in some countries government pays refunds for tax loss!. Hence the act has
used the term taxes payable and recoverable both.
◘◘ Tax base of asset / liability: It is the amount attributable to that asset or liability for tax purposes.
◘◘ Carrying amount of asset / liability: It is the amount attributable to that asset or liability for
accounting purposes.
◘◘ Deductible temporary differences: Carry forward of unused tax losses and credits. IT gives rise to
the recovery of tax if the asset / liability is settled. à it gives rise to DTA
◘◘ Taxable temporary differences: It results in the payment of tax when the carrying amount of the
asset or liability is settled à it gives rise to DTL
◘◘ Deferred tax assets: The amounts of income taxes recoverable in future periods. It is the tax effect
on Deductible temporary difference.
◘◘ Deferred tax liabilities: The amounts of income taxes payable in future periods. It is the tax effect on
Taxable temporary difference.
DO YOU KNOW
Tax base = Carrying Amount → No DTA / DTL
For an Asset: Tax base > Carrying Amount → DTA
For an Asset: Tax base < Carrying Amount → DTL
For a liability: Tax base > Carrying Amount → DTL
For a liability: Tax base < Carrying Amount → DTA
Consolidated Financial Statements

(1) Temporary differences can also arise from adjustments on consolidation.
(2) Deferred tax is determined on the basis of the consolidated financial statements and not the individual
entity accounts.
(3) Therefore, the carrying value of an item in the consolidated accounts can be different from the
carrying value in the individual entity accounts, thus giving rise to a temporary difference.
(4) An example is the consolidation adjustment that is required to eliminate unrealized profits / losses
on intergroup transfer of inventory. Such an adjustment will give rise to a temporary difference,
which will reverse when the inventory is sold outside the group….refer Problem.
IND AS 12: TAXES ON INCOME 26
Diagram 1: Determination of deferred tax asset and liability
Is tax treatment
diffrent from Deffered tax accounting
NO
accounting not required
treatment
YES
Difference
Whether
economic
benefits Carrying value
NO
taxable/ = Tax Base
deductiable
in future
No differed
tax implications
YES
Asset - CV > TB Asset - CV < TB

Liability - CV < TB Liability - CV > TB
Taxable Deductible
temporary difference temporary difference
Deferred tax liabillity Deferred tax asset
Problems 1: An entity acquired plant and equipment for ₹ 10,00,000 on 1/4/2015. The asset is depreciated
at 30% a year on the straight-line basis, and local tax legislation permits the management to depreciate the
asset at 25% a year for tax purposes. At the end of March 2017 the asset was tested for impairment and the
recoverable amount estimated to be ₹ 3,00,000.
Required: Calculate the following for each of the years: 31/3/2016, 31/3/2017:
Carrying amount of the asset
Tax base of the asset
Taxable temporary difference
Deductible temporary difference
DTA / DTL
Assuming tax rate of 30%.

Solution:
Year Carrying Tax Base Deductible TD Taxable TD DTA # DTL
Amount
31/3/2016 ` 7,00,000 7,50,000 50,000 - 15,000 -
31/3/2017 ` *3,00,000 5,00,000 2,00,000 - 60,000 -
* 3,00,000 = 7,00,000 – 3,00,000 depn – 1,00,000 impairment loss = ₹ 3,00,000.
# DTA in the first year is ₹ 15000 and in the second year it increased to ₹ 60,000 which means DTA further
arises ₹ 45,000 during 31/3/2017.
Problems 2: Land carried in the balance sheet ₹ 45,00,000 as on 31/3/2016. It was revalued @ 40% upwards.
Tax rate 30%. Calculate the following: Carrying Amount, Tax base (TB), Deductible Timing Difference (DTD),
Deferred Tax Asset (DTA), Taxable Timing Difference (TTD), Deferred Tax Liabilities (DTL).
Solution:
CA = `63,00,000, TB = ` 45,00,000, TTD = `18,00,000, DTL = ₹ 5,40,000 (the company will sell the asset and
then it has to pay tax on revaluation).
Land Dr ` 18,00,000
To Revaluation Reserves `18,00,000
Revaluation Reserves Dr ` 5,40,000
To DTL ` 5,40,000
Problems 3: From the following calculate Carrying Amount, Tax base (TB), Deductible Timing Difference
(DTD), Deferred Tax Asset (DTA), Taxable Timing Difference (TTD), Deferred Tax Liabilities (DTL).
The following are some of the transactions related to Systis Co.
The following details for the year ended 31.03.2016, being the end of the reporting period, are given:
1. Interest receivable is ₹ 100,000 is included in the SOFP (balance sheet). This will be included in the
taxable profit when cash is collected.
2. Development costs of ₹200,000 were incurred. They are capitalised and are to be amortised over
future periods when determining the accounting profit. However, the amount is deducted when
determining the taxable profit for the year 31.3.2016.
3. The cost of retirement benefits provided for (unpaid on end of the reporting period) of ₹50,000
while determining accounting profits. However, the amount is deductible for tax purposes only when
contributions are paid into a fund.
4. Research costs worth ₹30,000 are recognised as an expense while determining the accounting profits.
According to local tax laws, the amount is permitted as a deduction in the future on the fulfillment of
certain conditions.
Show the effect of these transactions on the financial statements of Systis Co. Tax 30%.
Solution:
Carrying Tax Base Deductible TD Taxable TD DTA DTL
Amount
`1,00,000(A) Nil - `1,00,000 - `30,000
`2,00,000(A) Nil - `2,00,000 - `60,000
`50,000(L) Nil `50,000 - `15000 -
`30,000* `9000 - `9000
30,000* it is the tax base which indicate the amount of deduction to be received in future. In
Accounting Income it is already expensed.
IND AS 12: TAXES ON INCOME 28
Net Summarised Entry:

DTA Dr `24,000
To P/L `24,000
P/L Dr `90,000
To DTL `90,000
Problems 4: An entity purchases plant and equipment for $2 million. In the tax jurisdiction, there are no tax
allowances available for the depreciation of this asset; neither are any profits or losses on disposal taken into
account for taxation purposes. The entity depreciates the asset at 25% per annum. Taxation is 40%.
Required: Explain the deferred tax position of the plant and equipment on initial recognition and at the first
yearend after initial recognition. Also calculate DTL / DTA.
Solution: Tax base = Nil, DTA/ DTL = Nil. The entity will not receive any tax benefit in any way from the asset.
It is a permanent difference.
Problems 5: Menulist Limited a subsidiary of Catalogue Limited sold goods costing ₹ 10,00,000 to its parent
for ₹ 11,00,000 and all of these goods are still held in inventory at the year-end. Assume a tax rate of 40%.
Required: Explain the deferred tax implications.
Solution: The unrealized profit of ₹ 1,00,000 will have to be eliminated from the consolidated income
statement and from the consolidated balance sheet in group inventory. The sale of the inventory is a taxable
event, and it causes a change in the tax base of the inventory. The carrying amount in the consolidated financial
statements of the inventory will be ₹10,00,000, but the tax base is ₹11,00,000. This gives rise to a deferred tax
asset of ₹1,00,000 at the tax rate of 40%, which is 40,000.
Problems 6: How to treat business combinations under Ind AS-12?
Solution: With limited exceptions, the identifiable assets acquired and liabilities assumed in a business
combination are recognised at their fair values at the acquisition date. Temporary differences arise when
the tax bases of the identifiable assets required and liabilities assumed are not affected by the business
combination or are affected differently. For example, when the carrying amount of an asset is increased to fair
value but the base of the assets remains at cost to the previous owner, a taxable temporary difference arises
which results in a deferred tax liability. The resulting deferred tax liability affects goodwill.
Problems 7: How to treat goodwill in Ind AS-12?
Solution: Many jurisdictions do not allow reductions in the carrying amount of goodwill as a deductible
expense in determining taxable profit. Moreover, in such jurisdictions, the cost of goodwill is often not
deductible when a subsidiary disposes of its underlying business. In such jurisdictions, goodwill has a tax base
of nil. Any difference between the carrying amount of goodwill and its tax base of nil is a taxable temporary
difference. However, this standard does not permit the recognition of the resulting deferred tax liability
If the carrying amount of goodwill arising in a business combination is less than its tax base, the difference
gives rise to a deferred tax asset. The deferred tax asset arising from the initial recognition of goodwill shall
be recognised as part of the accounting for a business combination to the extent that it is probable that
taxable profit will be available against which the deductible temporary difference could be utilised.
Deferred tax liabilities for taxable temporary differences relating to goodwill are, however, recognized to the
extent they do not arise from the initial recognition of goodwill. For example, if in a business combination
an entity recognizes goodwill of ₹ 100 that is deductible for tax purposes at a rate of 20 per cent per year
starting in the year of acquisition, the tax base of the goodwill is ` 100 on initial recognition and Rs 80 at the
end of the year of acquisition. If the carrying amount of goodwill at the end of the year of acquisition remains
unchanged at Rs 100, a taxable temporary difference of Rs 20 arises at the end of that year. Because that
taxable temporary difference does not relate to the initial recognition of the goodwill, the resulting deferred
tax liability is recognized.
CHAPTER 7
IND AS 16: PLANT, PROPERTY
AND EQUIPMENT
Chapter Outline
vv Cost in case of exchange of asset
vv Discussion on Component a/c, Spare Parts, Standby
Equipment, Overhauling as per Ind AS - 16
vv Provision For Depreciation
Ind AS-16 AS-16

Ind AS – 16 is known as Plant Property Equipment (PPE) AS - 16 is known as Accounting for Fixed Assets.
Ind AS- 16 in totality covers Fixed Assets and Deprecation. AS-10 Covers Fixed Assets only and AS-6+Schedule II covers
Depreciation provisions.
Recognition criteria for Fixed Assets are provided by the No such criteria given. If it looks like a fixed asset then it is
Standard i.e. economic benefit should flow from the asset a fixed asset.
In line with Ind AS-37 Provisions…Costs of dismantling and No such provision made.
site restoration is to form part of cost of asset at its present
value.
Ind AS – 16 provides 2 options for carrying the assets: (i) Initially the asset is recognized at cost. Subsequently it is
Cost Model; (ii) Revaluation / Fair Value Model. It is one revalued. Revaluation is based on certified valuation and
of the A/C policy to be adopted by a company. It is to be not on fair valuation.
regularly practiced. Revaluation is based on fair valuation.
Component accounting is mandatory in Ind AS – 16. AS-10 does not mandate component a/c. But Schedule II
now mandates component a/c.
Cost of inspection and overhaul is dealt in greater details. Overhaul is to be written – off immediately. Deferment is
Cost of overhaul should be depreciated over the next abandoned.
overhaul.
Cost of dismantling is a part of cost of asset at present value. Not considered.
Abnormal costs of materials, labour is to be charged to Not provided.
income a/c in case asset is self-constructed.
Accounting for deferred credit is covered. Not provided for. But it is covered through a provision on
Hire – purchase (asset acquired under special case).
Fixed Assets jointly held or purchased on Consolidated It provides guidelines on jointly held as well as about asset
basis is not covered. acquired under consolidated basis.
Review of depreciation method is based on more of Method of depreciation will undergo a change only if
estimates (management work). allowed by law / statute.
Change in Depreciation method is a change in Accounting Change in Depreciation method is a change in Accounting
estimate. policy
Compensation for impairment receivable is to be disclosed Not provided.
in the profit/ loss statement.
Gain on sale of asset is not Revenue. It is transferred to P/L. AS-10 is silent on this issue.
Asset held out of active use or held for sale is separately Asset held out of active use or held for sale is covered in
covered by Ind AS -105. the existing standard: Valued at carrying amount or NRV
whichever is less.
Assets acquired in consideration other than cash is based Assets acquired in consideration other than cash is based
on incoming asset (if FV can be reliably measured) on outgoing asset (if FMV of outgoing asset can be reliably
measured).
Stripping costs is covered by Standard Interpretation Stripping costs is not covered by AS-10.
Committee.
DO YOU KNOW
Deferred Credit is covered commonly by the following Ind AS:
Plant, Property Equipment:
Inventory:
Investment Property
Intangible Asset
Financial Asset
Financial Liability

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

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

Cost in case of purchase in consideration of cash
An item of property, plant, and equipment that satisfies the recognition criteria should be recognized initially
at its cost. The Standard specifies that cost comprises:
◘◘ Purchase price, including import duties, nonrefundable purchase taxes, less trade discounts and
rebates.
IND AS 16: PLANT, PROPERTY AND EQUIPMENT 31
◘◘ Costs directly attributable to bringing the asset to the location and condition necessary for it to be
used in a manner intended by the entity
◘◘ Initial estimates of dismantling, removing, and site restoration costs.
Examples of directly attributable costs include
◘◘ Employee benefits of those involved in the construction or acquisition of an asset
◘◘ Cost of site preparation
◘◘ Initial delivery and handling costs
◘◘ Installation and assembly costs
◘◘ Costs of testing, less the net proceeds from the sale of any product arising from test production (Trial
run).
◘◘ Borrowing costs to the extent permitted by Ind AS 23, Borrowing Costs
◘◘ Professional fees
Examples of costs that are not directly attributable costs and therefore must be expensed in the income statement
include
◘◘ Costs of opening a new facility (inaugural expenses)
◘◘ Costs of introducing a new product or service e.g.: advertisement
◘◘ Office and administration expenses e.g.: office rent
◘◘ Advertising and promotional costs
◘◘ Costs of conducting business in a new location or with a new class of customer
◘◘ Training costs
◘◘ Administration and other general overheads
◘◘ Costs of incidental operations, Example: cost of material for sample testing (not intended to be for
commercial reason)
◘◘ Initial operating losses e.g.: loss of gross profit due to low capacity.
◘◘ Costs of relocating or reorganizing part or all of an entity’s operations e.g.: costs of shifting business.
PROBLEM & SOLUTIONS
Problem 1: Pollisure Limited is installing a new plant at its production facility. It has incurred these costs: 1)
Cost of the plant (cost as per supplier’s invoice plus taxes) ₹ 75,00,000, includes refundable taxes ₹ 1,70,000
and non – refundable taxes ₹ 6,45,000, 2) Initial delivery and handling costs ₹ 200,000, 3) Cost of site
preparation 5,00,000, 4) Consultants used for advice on the acquisition of the plant ₹700,000, 5) Estimated
dismantling costs to be incurred after 5 years ₹ 5,20,000, 6) Trial run costs : Materials ₹ 2,20,000, Labour
₹ 1,87,000, Overheads ₹ 1,70,000. The entire product was sold at 75% of cost. 7) Inauguration expenses
₹25,000, 8) Operating losses before commercial production 1,10,000. Discounting rate: 10%.
Required: Please advise Pollisure Limited on the costs that can be capitalized in accordance with Ind AS - 16.
Solution:
According to Ind AS - 16, these costs can be capitalized:
Cost of the plant:
Purchase price ₹ 75,00,000 - refundable taxes ₹ 1,70,000 +Initial delivery and handling costs ₹ 200,000
+ Cost of site preparation 5,00,000 + Consultants used for advice on the acquisition of the plant
₹700,000 + PV of Estimated dismantling costs to be incurred after 5 years ₹ 3,22,879* + Trial run costs
: Materials ₹ 2,20,000+Labour ₹ 1,87,000+Overheads ₹ 1,70,000 – Sale proceeds of trail run production
(187000+170,000+220,000) × 0.75 = ₹ 95,37,129.
Inauguration expenses ₹25,000, Operating losses before commercial production ₹1,10,000 cannot be
capitalized. They should be written off to the income statement in the period they are incurred.
* PV of ₹ 5,20,000 = ₹5,20,000 / (1+0.10)5 = ₹ 3,22,879
COST IN CASE OF EXCHANGE OF ASSET

If an asset is acquired in exchange for another asset, then the acquired asset is measured at its fair value. In
the following cases the deemed cost will not be the Fair Value:
(i) if the exchange lacks commercial substance
(ii) or the fair value cannot be reliably measured,
in which case the acquired asset should be measured at the carrying amount of the asset given up.
COST OF ASSET IN CASE OF SHARE BASED PAYMENT: If the asset is acquired under share based payment
transaction, its cost will be determined as per Ind AS – 102.
COST OF ASSET IN CASE OF DEFERRED CREDIT BASIS: The cost of an asset is measured at the cash price
equivalent at the date of acquisition. If payment is “deferred” beyond normal credit terms, then the difference
between the cash price and the total price is recognized as a finance cost and treated accordingly. The general
practice is not to discount the future cash flows. (for illustration refer Ind AS- 2).
DISMANTLE AND RESTORATION COST: Dismantle and site restoration cost is to be capitalized to the cost
of an asset. It is incurred while the asset is installed. A provision at present value is required for the site
restoration cost on the other hand. In case of a Mine site restoration costs is to be added to the mine. But
the further digging and extracting of ore is to be added to the inventory production while the inventory is
extracted.
Discussion on Component a/c, Spare Parts, Standby Equipment, Overhauling as per

Ind AS - 16
Component Accounting
Recognition: Useful life specified in the Schedule II to the Companies Act is for whole of the asset. Where
cost of a part of the asset is significant to the total cost of the asset and useful life of that part is different from
the useful life of the remaining asset, useful life of that significant part will be determined separately. Ind
AS and Schedule II mandates ‘component approach’, which is in line with international practices. It requires
companies to separately depreciate part of an asset that are significant and have a useful life different from
the useful life of the asset as a whole. Previously companies use to charge component replacement to profit /
loss account. But now it will be separately capitalised.
Deprecation: Depreciation of component is to be independently depreciated separate from the remaining

asset.
Examlpe: Building and its Elevator can be treated as a separate component. Also Aircraft body and its
engine can be treated as two separate assets.
Derecognition: Old component will be eliminated (derecognized) and new asset will be recognized.
Depreciation of such component is independent of other assets.
Stand - By Equipment
Recognition: It is a separate asset and hence qualifies for PPE.
Deprecation: It is depreciated as per normal rates provided in Schedule II.
Derecognition: SBE will be eliminated (derecognized) separately and a new asset will be recognized.
Depreciation of such SBE is independent of other assets.
Major spares
Recognition: Major spare parts also known as capital spare parts. They are used in relation to specific
machinery. They are capitalized when consumed.
Deprecation: Such spare parts are depreciated over the useful life of the principal asset.
Derecognition: When machinery spares and component parts are replaced the old part is derecognized and
new part is recognized. The depreciation of the replaced parts will be only to the extent of the life of the old
asset.
Other spare parts like consumables, maintenance supplies
Recognition: They are expensed to P/L on consumption.
Deprecation: N.A.
Derecognition: When such spares are replaced by new parts, the carrying amount of old part is continued to
be depreciated. Cost of new part is written – off.
Presentation in B/S:
Stand By Equipment → Separate fixed asset
Unconsumed component / major spare parts → capital wip (fixed asset)
Unconsumed other spare parts → Inventory (current asset)
CASE LAW
FCL operates a fleet of helicopters. FCL holds a large stock of rotables, which is an integral part of the helicopters. The rotables
have a life of more than 1 year.
Here rotables satisfy both th conditions of PPE: Rotables held for goods and services. Also the expected life is more than 1
year. Rotables are major spare part and hence capitalized.
Overhauling expenses (subsequently incurred)

Recognition: Regular inspections and overhaul charges à Transferred to P/L.
Major inspections and overhaul charges (may be once in 3-4 years) à Separately Capitalised
Deprecation: Such capitalized overhaul is to be depreciated till the next overhaul.
Derecognition: N.A.
Compensation for impairment: For impairment losses, reference should be made to IAS 36. In this context,
any compensation received for impairment or loss of an asset shall be included in the income statement.
Measurement After Recognition:
After initial recognition of an item of property, plant, and equipment, the asset should be measured using
either the cost model or the revaluation model.
The cost model requires an asset, after initial recognition, to be carried at cost less accumulated depreciation
and impairment losses.
The revaluation model requires an asset, after initial recognition, to be measured at a revalued amount, which
is its fair value less subsequent depreciation and impairment losses. In this case, fair value must be reliably
measurable. Revaluations must be made with sufficient regularity to ensure that the carrying amount is not
materially different from fair value. However, if an asset is revalued, then the entire class of asset must be
revalued, again to avoid “cherry-picking” and a mixture of valuation bases.
Provisions regarding Revaluation with depreciation is same as AS-10. Upward / downward revaluations,
utilising of Revaluation surplus is also similar.
DO YOU KNOW
In Ind AS-16 Revaluation Surplus is passed through Other Comprehensive Income net off tax (DTL) and cred-
ited ultimately to equity.
Derecognition: Derecognition is the opposite of recognition. The carrying amount of an item of property,
plant, and equipment shall be derecognized:
(a) on disposal (disposal can be sale / entering into finance lease / donation),
(b) when no future economic benefit is expected from its use or disposal.
Any gain on disposal is the difference between the net disposal proceeds and the carrying amount of the
asset. Gains on disposal shall not be classified in the income statement as revenue, it will be shown as Other
Income.
DO YOU KNOW
Transferring an asset from use to Held for Sale is not dercognition but reclassification of asset.
Stripping costs: In oil and gas exploration, exploration and production costs are accounted for using the
successful efforts method. Under this method, costs of successful exploratory drilling and drilling operations
are capitalized as property, plant, and equipment.
Successful drillings are depreciated based on the production and the estimated available resources.
Geophysical investigations, including unsuccessful exploratory drilling, exploratory and exploratory dry-hole
costs are charged against income.
PROVISION FOR DEPRECIATION

Remember provisions relating to Depreciation are same in Ind AS-16 and Schedule II.
Meaning of Depreciation, Rates (covered by Part ‘C’ of Schedule II), Method (SLM, WDV and Units of production
method), provisions are same.
Derecognition of Depreciation: As per Ind AS- 16; Depreciation will be derecognized on Sale, on eliminating
an asset which provides no economic benefits, reclassification of asset from fixed asset to NCA – Held for Sale
Ind AS – 105.
Some problems on overhauling spare parts, subsequent expenditure etc:
Problem 2: Zhanubori (P) Ltd purchases a complex Asset A on 1/4/2015. It consists of the following:
Cost (`) Estimated life
Component M 15,00,000 12 years
Major Spare part X 6,00,000 6 years
Remaining asset 17,00,000 16 years
Ignore estimated salvage value for all calculations.

Major part is replaced after 5 years at a cost of ₹ 6,50,000. Sale proceeds of old major part was ₹ 2,50,000.
Compute the Deprecation for the year 2019-2020 and the year 2020-2021.
Solution:
Remaining asset
Component
Date Particulars
(including spare
n = 12
part) n = 16
1/4/2015 Cost 15,00,000 23,00,000
5 years → Provision for depreciation *(6,25,000) **(7,18,750)
31/3/2020 Carrying amount 8,75,000 15,81,250
Less: Spare part sold - ***(4,12,500)
Add: Addition - +6,50,000
31/3/2020 Balance 8,75,000 18,18,750
2020-2021 Depreciation (1,25,000) (1,65,341)
Depreciation for 2019-2020 = `1,25,000 + ` 1,43,750 = ₹ 2,68,750

Depreciation for 2020-2021 = ` 1,25,000 + ` 1,65,341 = ₹ 3,90,341.
* `6,25,000 = `15,00,000 x 5 / 12 ; ** 718750 = ` 23,00,000 x 5/ 16 ;
*** Journal:
Cash Dr 250,000
Loss on sale 162500
To Asset (spare) `412500 (`60,0,000 - `60,0000 × 5/16)
Problem 3: Birdy Airways, an aviation company, acquired an aircraft for ₹ 21,00,000. The aircraft is expected
to have life of 15 years. Birdy Airways is required to have aircraft inspected every three years to ascertain
whether they are travel worthy.
Without the inspection, which requires a high degree of expertise, Samson Airways cannot operate the
aircraft. The cost attributable to inspection is ₹600,000 (cost of inspection is included in the above cost of aircraft).
Birdy acquired the aircraft on the previous inspection, which was carried out on 1 April 2017. As at 1 April
2020 Birdy Airways incurred ₹7,50,000 as the cost of the new inspection.
Required:
Compute depreciation as per Ind AS – 16 for 1/4/2017 till 31/3/2020, as well as from 1/4/2020 till
31/3/2020.
Solution: Birdy Airways will recognize the aircraft at ₹ 15,00,000, depreciate it over 15 years and recognize
the inspection cost at ₹600,000 deprecating it over 3 years.
April 2017 to April 2020
Depreciation charge `
Aircraft to be depreciated over 15 years= 1,500,000/15 years inspection cost to be depreciated 100,000
over 3 years=600,000/3 years 200,000
Total depreciation to be recognized each year 300,000
April 2020 to April 2023

The company should recognize the inspection cost of ₹750,000 and derecognize the earlier cost:
Depreciation charge `
Aircraft to be depreciated over 15 years= 1,500,000/15 years 100,000
Inspection cost to be depreciated over 3 years= 750,000/3 years 250,000
Total depreciation to be recognized each year 350,000
CHAPTER 8
IND AS 17: LEASES
Chapter Outline
vv Differences between AS-19 and Ind AS – 17.
vv Special provision on Land in Ind AS – 17
Differences between AS-19 and Ind AS – 17.

AS-19 Ind AS – 17
AS-19 completely scoped out Lease on Land. It impliedly covers Land. In its scope for exclusion Land is
not excluded.
AS-19 is applicable from the date of the inception of lease. Ind AS-17 is applicable from the date of the commencement
of lease. It makes a difference between commencement
and inception of lease.
Current and Non – Current classification is covered by Ind AS – 17 makes a classification for lease receivables and
Schedule III and not AS-19. payables between current and non – current portion.
In case of Sale and Lease Back (SLB) transaction (finance In case of Sale and Lease Back (SLB) transaction (finance
lease) the profit or loss on sale is to be deferred in the ratio lease) the profit (not the loss) on sale is to be deferred.
of depreciation. Ind AS – 17 does not provide the guidance on the ratio of
amortization.
AS – 19 has no mention on: price inflation and incentives in It considers both the aspect.
case of Operating lease.
Initial Direct Costs: Initial Direct Costs:
FL: Books of lessor: either expensed or deferred in the ratio FL: Books of lessor: Expenses are included to compute IRR
of finance income of the investments. Also refer Ind AS – 109.

Scope: The Standard shall not be applied in the measurement of
◘◘ Property held by lessees as an investment property (see IAS 40)
◘◘ Investment property provided by lessors under operating leases (see IAS 40)
◘◘ Biological assets held by lessees under finance leases (see IAS 41)
◘◘ Biological assets provided by lessors under operating leases (see IAS 41)
Special provision on Land in Ind AS – 17

◘◘ Leases of land, if title is not transferred, are classified as operating leases, as land has an indefinite
economic life.
◘◘ If the title to the land is not expected to pass to the lessee, then the risks and rewards of ownership
have not substantially passed, and an operating lease is created for the land.
◘◘ Leases of land and buildings need to be treated separately, as often the land lease is an operating lease
and the building lease, a finance lease. Difficulties arise because the minimum lease payments need
to be allocated between the land and the building element in proportion to their relative fair values
of the leasehold interests at the beginning of the lease. If the allocation cannot be made reliably, then
both leases are treated as finance leases or as operating leases, depending on which classification the
arrangement more clearly follows.
Commencement of lease and inception of lease: As per Ind AS-17 inception of lease is the earlier of date
of the lease agreement and the date of commitment of the parties to the terms of lease. The commencement
of lease is the date when the lessee can use the leased asset.
Incentives and inflation: Appendix A to Ind AS- 17 requires all incentives for the operating lease to be
recognized as a part of lease. The lessor recognizes the aggregate cost of incentives as a reduction from total
lease rentals and the balance should be recognized on straight line basis or any other systematic pattern.
Lease rentals are recognized on SLM except in the following 2 cases:
(a) Any other basis is more representative of the time pattern of the user’s benefit. Ex: ration of
production under a patent right.
(b) Lease rentals are structured to increase in line with the inflation.
PROBLEM & SOLUTIONS
Problem 1: Duruyog Zanmash Firm has entered into a lease of property whereby the title to the land
does not pass to the entity at the end of the lease but the title to the building passes after 15 years. The
lease commenced on 1/4/2015, when the value of the land was ₹540 lakhs and the building value was ₹180
lakhs. Annual lease rentals paid in arrears commencing on 31/3/2016, are ₹60 lakhs for land and ₹ 20 lakhs
for buildings. The entity has allocated the rentals on the basis of their relative fair values at the start of the
lease. The payments under the lease terms are reduced after every 6 years, and the minimum lease term is
30 years. The net present value of the minimum lease payments at 1/4/2015, was ₹ 400 lakhs for land and ₹
170 lakhs for buildings. Building is written off on straight-line basis over their useful life of 15 years. Assume
an effective interest rate of 7%.
Required: Discuss how DZ Firm should treat this lease under Ind AS 17.
Solution:
Ind AS 17 requires the substance of the transaction to be reviewed and the extent to which the risks and
rewards of ownership of the leased asset are transferred to be determined. If the risks and rewards of
ownership are substantially transferred to the lessee, then the lease is a finance lease. The Standard requires
the land and buildings elements to be considered separately. Normally a lease of land will be regarded as an
operating lease unless the title passes to the lessee. In this case the title does not pass and the present value
of the lease payments is only 74% of the fair value of the land, which does not constitute substantially all of
the fair value of the leased asset, one of the criteria for the determination of a finance lease. Land will not be
recorded as an asset.
In case of the building, the title passes after 15 years, and the lease runs for the whole of its economic life,
which indicates a finance lease. The present value of the minimum lease payments is 94% of the fair value of
the lease at its inception, an amount that indicates that the lessee is effectively purchasing the building.
IND AS 17: LEASES 38
Extracts……………………………DZ Firms (Lessee) Balance sheet as on 31/3/2016 ₹ lakhs

Liabilities Assets
Non Current portion
Lessor Ltd 164.68 Building (170-11.33) = 158.67
Current portion
Lessor Ltd 7.92
Dr Revenue Statement:……………………………… Cr
Dr Cr
Depreciation on Bldg 11.33
Finance exp. 12.06
Operating lease 60.00
WN: Calculation of Finance chgs for 2 years
Opn. Balance Effective Int. 7% MLP Principal Portion Bal.

170.00
170.00 11.9 20 8.1 161.9
Problem 2: Muradan Bros leases an asset on operating lease basis ₹ 1,00,000 per annum. As an incentive
it also provided the incentive of compensating all the relocation costs. Estimated relocation costs will be ₹
20,000. Lease is for 5 years. Compute Annual lease.
Solution:
Gross lease = ₹ 1,00,000 × 5 = ₹ 5,00,000 less 20,000 = ₹ 4,80,000
Rent per annum = ₹ 96,000 (`480,000 / 5)
Problems on: IRR in lease and even how to reset IRR:
Problem 3: Suppose Lessor X has let out a property to Lessee Y for ` 330,000. MLP is ` 1,00,000 each year
and `. 20,000 as a GRV. The total estimated RV = `. 30,000.
FMV = MLP1+ MLP2 + MLP3 + MLP4+UGRV
(1+r)1 (1+r)2 (1+r)3 (1+r)4
Lessee Dr 3,30,000 (net investment)

To Asset 3,30,000
₹ 3,30,000 = ₹ 1,00,000 + ₹ 1,00,000 + ₹ 1,00,000 + ₹ 1,30,000

(1+r)1 (1+r)2 (1+r)3 (1+r)4
PVF 10% PVF 12% PVCF PVCF

0.9091 0.893 90,910 89,300
0.8264 0.7972 82,640 79,720
0.7513 0.7118 75,130 71,180
0.683 0.6355 88,790 82,615
3,37,470 3,22,815
-3,30,000 -3,30,000
7470 -7185
By interpolation:
10% + 7470 /14655 x 2% = 11% approx
Problem 4: Now suppose Lessor incurs ` 6000 as legal and other incidental expenses for the lease agreement.
A combined understanding of Ind AS-17 and Ind AS – 109 provides the following solution.
Initial Direct Costs:
Finance Lease: Books of lessor: Expenses are included to compute IRR of the investments. As per Ind AS –
109 the expenses incurred for Financial Asset (other than FVTPL) is to be adjusted in the asset.
1,00,000 + 1,00,000 + 1,00,000+ 1,00,000

3,36,000 =
(1+r)1 (1+r)2 (1+r)3 (1+r)4
Revised IRR will be reset at 10.20% (approx.)

Lesee a/c Dr `3,36,000
To Asset `3,30,000
To Cash `6,000
(entry for initial recognition)
CHAPTER 9
IND AS 19: ACCOUNTING FOR
EMPLOYEES BENEFITS
Chapter Outline
vv Some more important points on Ind AS-19
Ind AS-19 AS-15

The Actuarial gain / loss is immediately transferred to The Actuarial gain / loss is immediately transferred to
income statement. It is transferred to Other Comprehensive income statement (P/L) a/c.
Income (OCI) account.
Both Vested as well as Non – Vested benefits is charged to Both Vested is transferred to profit / loss a/c and Non –
profit / loss a/c. Vested is amortised equally over the vesting period.
Ind AS replaces the interest cost on defined benefit AS – 15 recognises the interest cost on defined benefit
obligation and the expected return on plan assets by the obligation and the expected return on plan assets are
concept of NET INTEREST. recorded separately.
Discounting LTB / RB companies in India apply government AS-15 considers the government yield / T-Bill rate for
yield rate. For foreign operations quality bond rate should discounting the LTB / RB.
be considered as a discounting rate.
Employee expenses accrue not only because of statutory Not covered.
act, agreement, but also due to some informal practice
(constructive obligation).
Timing of recognition of termination benefit is based on No such guidance is provided (We just depend upon AS-29
some specific events. for recognition)
Share of an entity in the defined benefit plan attracts Not covered.
related party disclosures (Ind AS-24).
Financial assumptions should be purely market based. Ex: Not mentioned………..i.e. it may be a rate out of experience
of Financial assumptions can be discount rate, future salary, and not market rate.
return on plan assets, inflation etc.
Guidance on minimum contribution in the plan asset is No such guidance provided.
provided.
AS – 15 as well as Ind AS – 19 both the standards require an entity to recognize: A liability when an
employee has provided service in exchange for employee benefits to be paid in future.
Some more important points on Ind AS-19

(1) Informal practice : As per Ind AS – 19 the employee costs can also arise due to informal practice.
Obligations are normally enforceable due to statutory act, agreement, but some - times due to some
informal practice provisions are required to be made…….this is discussed in Ind AS-37.
For Example: Workers have rendered the service for the year ended 2015-16 hence a provision is
necessary for bonus for 2015-16 even if bonus is paid in November 2016. Bonus becomes constructive
obligation either due to the bonus act, due to an agreement between employer and employee or
sometimes bonus has to be provided for keeping good business relations…………….also refer Ind AS-
37 ….Provisions.
(2) Recognition principles for Termination benefits: Termination benefits are required to be
accounted differently from other employee benefits because it arises due to termination of
employment and not by rendering of service. AS – 15 highly depends upon AS-29 for Termination
benefits. In Ind AS-19 Termination benefits are provided based on some events to take place. It is the
earlier of the following events:
(i) when the entity can no longer withdraw the offer of those benefits,
(ii) when the entity recognizes costs for a restructuring that even includes cost of Termination
benefits.
(3) Actuarial gains and losses: It is also known as measurements. The Actuarial gain / loss arising on
account of retirement benefit is immediately transferred to income statement (OCI) and remember
recycling is not allowed. The Actuarial gain / loss arising on account of LTB is immediately transferred
to income statement (P/L) a/c.
The fact that actuarial gain / loss arising on account of defined benefit plans are now recognized in
OCI means they will permanently bypass profit or loss.
(4) Net interest concept: As per AS – 15 the interest cost on defined benefit obligation and the expected
return on plan assets are recorded separately. In Ind AS- 19 it is net interest. Net interest income /
expense = (FV of Plan Asset or PV of Obligation) whichever is higher x discounting rate.
PROBLEM & SOLUTIONS
Problem:1 Comment on the recognition of actuarial gain / loss: ₹

1/4/2016 The present value of the defined benefit obligation 4,00,000
1/4/2016 Opening unrecognized actuarial gains 70,000
1/4/2016 Fair value of the plan assets 3,20,000
Actuarial gains during the year ₹ 32,000
Remaining life of the employees is 12 years.
During the year Net actuarial gains recorded ₹ 12,000.
Solution:
(1) AS PER INDIAN GAAP AS-15: The entire actuarial gain is transferred to profit / loss. The entire gain
₹ 42,000 (12+30) transferred to P/L under the head Employee cost.
(2) AS PER IND AS - 19: The entire actuarial gain ₹ 42,000 is transferred to other comprehensive income account.
(3) AS PER IAS – 19 following 3 options available:
(ii) Corridor Approach of 10%
Step 1): Higher of 10% of PV of obligation or FV of plan assets = 10% of higher of (`4,00,000 or `3,20,000) = `40,000.
Step 2): Excess of 70,000 and 40,000 = i.e. opening cumulative actuarial g/l – Step 2 = `30,000
Step 3) Gain credit to Other Comprehensive income = Step 2 / N = `30,000 / 12 = ₹ 2500.
IND AS 19: ACCOUNTING FOR EMPLOYEES BENEFITS 42
(ii) Fast write – off: The accumulated gain is to be written off equally over balance period = `70,000
+ `32000 = ₹ 8500
(iii) Transfer the entire actuarial g/l ₹ 42,000 to OCI.
Problem 2: Kastashu Ltd operates a defined benefit plan which provides to the employees covered under
the plan a pension benefit which is equal to 0.75% of final salary for each year of service. Employees need to
complete 5 years for becoming eligible. On 1/4/2015, the entity improve the pension benefit to 1% of final
salary for each year of service including prior years.
The PV of DBP is therefore increases by 50,00,000. Composition is as below:
Employees with more than 5 years : `40,00,000
Employees with less than 5 years : ` 10,00,000 (require another 2 years of service until vesting)
Comment on the recognition of past service cost both as per AS – 15 and Ind AS - 19.
Solution:
As per AS-15: Full `40,00,000 is to be provided as it is vested .
And ` 5,00,000 is to be provided (1/2 × `10,00,000) as the remaining vesting period id 2 years.
As per Ind AS-15: Full `50,00,000 is to be provided to profit and loss account. It cannot defer any part of the cost.
Problem 3: At 01.04.2015 the FV of plan assets was ` 10,000. The PV of the defined benefit obligation was
` 8000. Discount rate 7% and return on assets 7.5%. Find the net interest as per AS and Ind AS.
Solution:
AS – 15:
Interest cost = 8000 x 7% = ` 560
Expected return on plan assets = ` 10,000 x 7.5% = `750.
Ind AS – 16:
Interest cost = `8,000 x 7% = ` 560
Net expected return = (`10,000 – `8,000) x 7%.= ` 140.
CHAPTER 10
IND AS 20 / IAS 20: ACCOUNTING FOR
GOVERNMENT GRANTS AND DISCLOSURE
OF GOVERNMENT ASSISTANCE
Chapter Outline
vv Differences between AS-12 Accounting for
Government Grants and Ind AS – 20.
vv Ind AS-20 deals with accounting of disclosures
for government grants and disclosures for
other forms of government assistance.
Differences between AS-12 Accounting for Government Grants and Ind AS – 20.
AS-12 Ind AS – 20
It does not cover Government assistance It covers Government assistance. Such Government
assistance should be disclosed.
For Depreciable Assets: Both Capital approach (less from Government grants: It should be recognized as income, on
asset) and Deferred approach is allowed. a systematic and rational basis, over the periods necessary
Non - Depreciable Assets: Its Capital Reserve if conditions to match them with the related costs. As a corollary, and
complied. Deferred if conditions are not complied. by way of abundant precaution, the Standard reiterates
Promoters Contribution: Equity. that government grants should not be credited directly
to shareholders’ interests This means crediting to Capital
Reserve or reduction from asset is not allowed.
Promoters Contribution: Credited to Capital Reserve Promoters Contribution: Grants should be recognized as
under the head shareholders’ funds income, on a systematic and rational basis, over the periods
necessary to match them with the related costs. Such
grants shall not be treated as capital receipt.
Non – Monetary Grants: NMG are recorded at concessional Non – Monetary Grants: NMG are recorded at Fair Value
price (acquisition cost) or nominal value. only.
AS-12 has forgone Forgiven loans Covers Forgiven loans as a grant.
No guidance on concessional loans as per AS-12. Concessional loans are treated at par with Ind AS-109
Financial Instruments by effective interest method.
Giving back the grant is known as “Refund of Government Giving back the grant is known as “Repayment of
Grant”. Government Grant”.
“Refund of Government Grant” as per AS-12 as well as by “Repayment of Government Grant” as per Ind AS-20 is
AS-5 is known as Extra – ordinary activity. known as change in Accounting estimates.
Grants for the compensation of past losses or grants for Grants for the compensation of past losses or grants for
immediate financial support should be transferred to Extra immediate financial support should be transferred to P/L
– ordinary activity. a/c or even deferred if conditions are yet to be complied.
Ind AS-20 deals with accounting of disclosures for government grants and
disclosures for other forms of government assistance.

Government assistance, according to the Standard, is action by the government aimed at providing
economic benefits to some constituency by subsidizing entities that will provide them with jobs, services, or
goods that might not otherwise be either available or available at a desired cost. Depending on the nature of
the assistance given and the associated conditions, government assistance can be of many types, including
grants, forgivable loans, and indirect or nonmonetary forms of assistance, such as technical advice, free legal
advice, guarantee. Government assistance may not be recorded but requires disclosure.
IAS – 41: Ind AS-20 does not covers the Government grants related to IAS 41. Grants received for Biological
assets are covered specifically by Ind AS-41 itself. But grants related to agriculture produce is to be covered
by Ind AS – 20.
General Grants: Government grants to all : like LPG Subsidy to all companies is not covered by IAS – 20. This
is because Ind AS – 20 is applicable to entity specific grants.
Fair value: The amount for which an asset could be exchanged between a knowledgeable, willing buyer and
a knowledgeable, willing seller in an arm’s-length transaction.
Forgivable loans: Those loans that the lender undertakes to waive repayment of under certain prescribed
conditions.
DO YOU KNOW
Sales tax exemption is not government grant as per Ind AS – 20 but it is a grant as per AS – 12.
Government grant is not revenue but other income.
PROBLEM AND SOLUTION
Problem 1: Zallosh Limited received a grant of ₹ 60,00,000 to compensate it for costs it incurred in planting
trees over a period of five years. Zallosh Ltd. will incur such costs in this manner:
Year Costs
1 ₹ 20,00,000
2 ₹ 40,00,000
3 ₹ 60,00,000
4 ₹ 80,00,000
5 ₹ 100,00,000
Total costs thus incurred will aggregate to ₹ 300 lakhs, whereas the grant received is ₹60,00,000.
Required:
Based on the provisions of IAS 20, how would Brilliant Inc. treat the “grant” in its books?
Solution:
Applying the principle outlined in the Standard for recognition of the grant, that is, recognizing the grant as
income “over the period which matches the costs” using a “systematic and rational basis”.
Year Grant recognized as deferred
IND AS 20 / IAS 20: ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE 45
1 ₹ 60,00,000 x (20/300) = ₹ 4,00,000

2 ₹ 60,00,000 x (40/300) = ₹ 8,00,000
3 ₹ 60,00,000 x (60/300) = ₹ 12,00,000
4 ₹ 60,00,000 x (80/300) = ₹ 16,00,000
5 ₹ 60,00,000 x (100/300) = ₹ 20,00,000
Problem 2: Xellon Ltd received a land by paying ₹ 6,00,000 to the government for construction a factory run
by a group of minority. The FV of the land at present is ₹ 50,00,000. The life of the factory is estimated to be
25 years. Pass journal entries as per Ind AS-20 for acquisition of land.
Solution:
Land Account Dr `50,00,000 (as per Ind AS-20 NM grant recorded @FV)
To Cash `6,00,000
To Deferred Grant `44,00,000
(The grant will be deferred over 25 years to P/L ₹ 176000 p.a.)
Problem 3: Forgivable loans: Natushara Bevan Cosmo is an export company has received the attention
of the State government of Gujarat. A loan outstanding ₹ 700 lakhs payable to ICICI Bank was waived by the
government by 10%. Account as per Ind AS-20.
Solution:
Loan from ICICI Account Dr ₹ 70 lakhs
To Income ₹70 lakhs
Problem 4: Concessional loans: Manusumti Watkar Ltd is dealing in organic farming as one of the
business activities. The company had taken a loan of ₹ 200 lakhs from Canara Bank under the instruction
of government. Manusumti is required to pay just 6% as interest. The market rate is 8%. Account as per Ind
AS-20. Even the repayment of 10% of the loan will be additionally waived if the loan is repaid within 4 years.
The company decides to repay the loan at the end of 4 years.
Solution:
Calculation of PV of Loan: (same as Ind AS-109 amortized cost) ₹ lakhs
Year Cash PVF 8% PVCF Opn. Effective Cash Amort. Bal.

flows balance Int Flows
0 172.05
1 12 0.9259 11.111 172.05 13.764 (12) 1.764 173.81
2 12 0.8573 10.288 173.81 13.905 (12) 1.905 175.72
3 12 0.794 9.53 175.72 14.06 (12) 2.06 177.78
4 192* 0.735 141.12 177.78 14.222 (192) --- ---
PV = 172.05
The difference between 200 and 172.05 will be deferred in the ratio of interest and principal benefit. The
benefit for 4 years = 1.764 : 1.905 : 2.06 : {2.222+20 principal) = 1.764 : 1.905 : 2.06 : 22.222.
Journal for yr 1: (₹ lakhs)
Cash A/C Dr 200.00
To Loan from Canara Bank 172.05
To Deferred grant 27.95
Finance cost A/C Dr 13.764 (trf to P/L)
To Cash 12
To Loan from Cosmo Bank 1.764
Deferred grant A/C. Dr 1.764

To Profit / Loss Account 1.764
Problem 5: On 1 October 2016 Epsilon opened a new factory in an area designated by the government as
an economic development area. On that day the government provided Epsilon with a grant of $20 million to
assist them in the development of the factory. This grant was in two parts:
(i) $12 million of the grant related to the construction of a large factory at a cost of $60 million. The land
was leased so the whole of the $60 million is depreciable over the estimated 30 year useful life of the
factory.
(ii) The remaining $8 million was received subject to keeping at least 200 employees working at the
factory for a period of at least five years. If the number drops below 200 at any time in any financial
year in this five year period then 20% of the grant is repayable in that year. From 1 October 2016 :
250 workers were employed at the factory and estimates are that this number is likely to increase
over the next four years. Your assistant has recognised the $12 million received in respect of the
factory as a credit to the income statement in the current year, on the basis that the factory has been
constructed and brought into use. He has not recognized any of the $8 million employment grant on
the basis that this is potentially repayable. He has charged $2 million in depreciation to the income
statement. Comment.
Solution:
Accounting for government grants is dealt with by Ind AS 20 – accounting for government grants and disclosure
of government assistance. The basic principle of Ind AS 20 is that grants should be recognised as income over
the periods necessary to match them with the related costs which they are intended to compensate, on a
systematic basis.
Where the grant relates to an asset Ind AS 20 allows deferred method of presentation in the balance sheet.
In this case this would mean recognising $400,000 ($12 million x 1/30) as a credit to the income statement
in the current year with the balance of $11·6 million ($12 million – $400,000) shown in the balance sheet as
a liability. $400,000 of this amount would be shown as a current liability with the balance of $11·2 million
shown as a non-current liability.
The same principle applies to the grant related to the employment of staff. The grant is probably not going
to be repaid so delaying recognition is inappropriate. Unless the likelihood of repayment is remote then it
would be appropriate to disclose the possible repayment as a contingent liability. $1·6 million ($8 million
x 1/5) of the employment grant should be recognised in the income statement for the current year. Ind AS
20 allows this amount either to be shown as ‘other income’ or as a reduction in the relevant expense. The
unrecognised balance of $6·4 million ($8 million – $1·6 million) would be shown as deferred income, with
$1·6 million shown as a current liability and $4·8 million as a non-current liability.
But has the company followed AS-12 or IAS – 20 the grant related to the asset would have even be reduced
from the asset.
DO YOU KNOW
Asset purchased at a concessional price is to be recognized at Fair Value which is common in the following AS.
Ind AS – 12 itself → Government Grants
Ind AS – 16 → PPE
Ind AS – 38 → Intangible Assets.
CHAPTER 11
IND AS 21: EFFECTS OF
CHANGES IN FOREIGN
EXCHANGE RATES
Chapter Outline
vv Exclusive discussion on IND AS – 21 vv
vv Lets decide the functional currency
of foreign operations
vv For problems on above please refer AS-11 (rev).
vv Comprehensive
Ind AS-21 AS-11

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

Some important definitions
(1) Functional currency: Functional currency is the currency of the primary economic environment in
which the entity operates.
(2) Closing rate: The spot exchange rate at the balance sheet date.
(3) Spot rate: The exchange rate for immediate delivery.
Ind AS-21 stress on Functional Currency. First lets determine the entity’s
FUNCTIONAL CURRENCY
AS-11 considers the reporting currency as measurement currency. An entity normally uses the currency of
the country in which it is domiciled. Ind AS considers the functional currency.
The functional currency should be determined by looking at several factors. This currency should be
the one in which the entity normally generates and spends cash and in which transactions are normally
denominated…………………substance over form. All transactions in currencies other than the functional
currency are treated as transactions in foreign currencies. Five factors can be taken into account in making
this decision the currency:
(1) That mainly influences the price at which goods and services are sold
(2) Of the country whose competitive forces and regulations mainly influence the entity’s pricing policy
(3) That influences the material, labour costs of the entity
(4) In which finance is generated
(5) In which receipts from operating activities are retained
PROBLEM & SOLUTIONS
Problems 1: From the following determine Functional Currency of Polar Bills Inc Ploar Bills Inc is an UK
based company.
(1) It pays 90% of cost of materials and labour in £. (ignore other conditions)
(2) It exports goods outside UK. Exports accounts for 50% of sales. It collects proceeds on a/c of sales in
various currencies but converts it into £ and retains it. (ignore other conditions)
(3) Almost 95% finance raised by Ploar Bills Inc is indigenous in terms of loan notes and equity (ignore
other conditions).
(4) Materials are purchased from Italy (almost 100%). Even 80% goods are sold in Italy. 20% goods are
sold in local market plus Asian Countries.
Solutions: (1) £, (2) £, (3) £, (4) €.
DO YOU KNOW
An entity incorporated / registered in India where → prevails may have any other currency as functional cur-
rency
After determining the Functional Currency of an entity now lets decide the Functional Currency of FOREIGN
OPERATIONS. One has to define the functional currency of Foreign Operations.
LETS DECIDE THE FUNCTIONAL CURRENCY OF FOREIGN OPERATIONS

Foreign operation: FO is a subsidiary, associate, joint venture, or branch whose activities are based in
another country.
An entity will have to determine the functional currency of a foreign operation, such as a foreign subsidiary,
and whether it is the same currency as that of the reporting entity.
Factors:
(1) If the activities of foreign entity is an extension of the reporting entity business → then Functional
currency of Foreign Operation = Functional currency of Reporting Entity.
IND AS 21: EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES 49
(2) If the proportion of Foreign Operation’s transactions are in high proportion with the Reporting Entity
→ then Functional currency of Foreign Operation = Functional currency of Reporting Entity.
(3) If enough autonomy is given to the Foreign Operation: → then Functional currency of Foreign
Operation ≠ Functional currency of Reporting Entity.
(4) If the funds raised by Foreign Operation will be repaid by Reporting Entity → then Functional
currency of Foreign Operation ≠ Functional currency of Reporting Entity.
Problems 2: From the following determine Functional Currency of Solepal Ltd an Indian Subsidiary of
Polar Bills Inc an UK based company.
(1) Loans ₹ 40 lakhs and Equity ₹ 10 lakhs is carried in the books of Solepal Ltd. The entire loans will be
repaid by the Parent Co. (ignore other conditions)
(2) Solepal Ltd manufactures auto products and sells the same to its parent company Polar Bills. 90% of
goods sold reflect inter - company sales. (ignore other conditions)
(3) Solepal Ltd is acting as a financing arm completely devoted towards its parent company.
(ignore other conditions)
Solutions: 1) £, 2) £, 3) £.
How to convert the forex transactions as well as a foreign operation whose currency is not functional
currency into its reporting entity’s currency.
Foreign Transactions: Transactions which requires settlement in Foreign Currency. Foreign Currency is the
currency other than Functional Currency.
Example: If Solepal Ltd an Indian Subsidiary of Polar Bills Inc an UK based company. If Solepal Ltd adopted
functional currency as £ (same as Reporting entity) then Conversion rules does apply.
IF Solepal Ltd adopts functional currency as ₹ → Conversion rules applies (discussed below).
Also any Foreign Exchange transaction of Polar Bills also requires Conversion rules.
Conversion of Foreign Currency to Functional Currency. (Same as AS – 11)
Financial Item Exchange Rate

Monetary item Closing Rate
Non – Monetary item carried @ Historical Cost Historical Rate
Non – Monetary item carried @ Fair Value Closing Rate
Revenue Items Actual / Average Rates
Problems 3: Mandekle Parameters Ltd sold goods worth $ 1000 to Greeny Doll Inc on 1/2/2016. The
functional currency as of Mandekle is ₹. Exchange rates: 1/2/2016: 1$ = ₹ 60, 31/3/2016: 1$ = ₹ 61,
31/5/2016: 1$ = ₹ 62.50.
Pass journal entries from inception till settlement in the books of Mandekle. What will be the answers if
the functional currency of Mandelke was $.
Solutions:
If functional currency is ` If functional currency is $
1 / 2 : Trade receivables Dr ` 60,000 1 / 2 : Trade receivables Dr $1,000
To Sales `60,000 To Sales $1,000
31 / 3: Trade receivables Dr `1000 31 / 3: No Entry
To Fx gain (P/L) `1000
(receivables are monetary items valued at closing rate)
31 / 5: Trade receivables Dr `1500 31 / 5: Cash Dr 1,000
To Fx gain (P/L) `1,500 To Trade receivables $1,000
Cash Dr `62,500
To Trade receivables `62,500
Problem 4: Tarape Ltd’s functional currency is Rupee. It has a building located in US acquired at a cost of US$
10,000 when the exchange rate was US$ 1=₹50. The building is carried at cost in the financial statements of T
Ltd. For the purpose of this example depreciation is ignored. At the balance sheet date, there is an indication
of impairment for this building. Consequently, an impairment test has been made in accordance with Ind AS
36 as at the balance sheet date and the recoverable amount of the building is determined to be US$ 9,500. The
exchange rate as at the balance sheet date is US$ 1= ₹53. Recoverable amount on 31/3 was $ 9500.
Solution: Though there is an impairment loss of US$ 500 (US$10,000-US$9,500) in terms of foreign currency,
there is no impairment loss in terms of functional currency. This is because, recoverable amount in terms of
functional currency (₹503,500) exceeds carrying amount (ie cost in this example) in terms of functional
currency (₹500,000). Hence, no impairment loss is recognised for the building.
Problem 5: Managme Ltd’s functional currency is Rupee. It has a building located in US acquired at a cost of
US$ 10,000 when the exchange rate was US$ 1=₹50. The building is carried at cost in the financial statements
of M Ltd. For the purpose of this example depreciation is ignored. At the balance sheet date, M Ltd has
decided to revalue upwards the property as per Ind AS-16. The MV = $ 15,000. The exchange rate as at the
balance sheet date is US$ 1= ₹53.
Solution: The revaluation gain of $15000 (53-50) i.e. ₹ 45,000 is transferred to Revaluation Reserves. If the
revaluation gain is transferred to Equity (Reserves) à the corresponding Fx gain will also be transferred to
Equity.
Accounting entry:
Land and Blgd Dr 500000
To Cash 500000
Land and Blgd Dr 295000
To Revaluation Reserve 295000 …(passed through OCI and stored in equity)
Transfer of Exchange Difference :Same as Indian GAAP AS-11
Particulars (refer AS-11 for better understanding) Exchange Difference (it is same as AS-11)
Exchange difference to the extent interest is saved on Capitalized to Qualifying asset
borrowings taken for qualifying assets………para 4 (e) of
AS-16
Generally (as per Ind AS-21) / AS-11 Profit / loss
Exception to Ind AS – 21 / AS-11……para 15. exchange Retained under the head Foreign Currency Translation
differences arising on monetary items that form part of the Reserve A/C.
reporting entity’s net investment in a foreign operation
Central Government circular – Long term monetary item Adjusted in Fixed Asset
used for acquire Depreciable Fixed Assets
Central Government circular – Long term monetary item Amortized equally over loan repayment date under the
used for other purpose head Foreign Currency Monetary Item A/C.
Non - Monetary Asset is revalued upwards Revaluation Reserves.
For problems on above please refer AS-11 (Rev).

As per ind as -21 it is not enough that the financial statements are recorded at functional currency. If the
presentation currency is not same as functional currecny then following procedure is to be adopted.
Presentation currency: The currency that is used to present the financial statements.
DO YOU KNOW
In most of the cases the Functional Currency is same as Presentation Currency…………..its like every Maharash-
trian speaks Marathi.
Note this: Foreign Currency → Functional Currency → Presentation Currency.

Translation to presentation currency from the functional currency
An entity can present its financial statements in any currency. If the presentation currency differs from the
functional currency, the financial statements are retranslated into the presentation currency. If the financial
statements of the entity are not in the functional currency of a hyperinflationary economy, then they are
translated into the presentation currency in this way:
◘◘ Assets and liabilities (including any goodwill arising on the acquisition and any fair value adjustment)
are translated at the closing spot rate at the date of that balance sheet.
◘◘ The income statement is to be translated at the spot rate at the date of the transactions. (Average rates
are allowed if there is no great fluctuation in the exchange rates.)
All exchange differences are recognized in a separate component of equity.
Any exchange difference that relates to the minority interest is recognized in the balance sheet amount.
Comprehensive
Problem 6: The Balance Sheet of Zanoloma Inc a British subsidiary as on 31/3/2016 is provided to you.
(Foreign Operation problem)
Liabilities £ Assets £ Additional information:

Share Capital 20000 Fixed Assets (Cost – Depn) 52000 Opening rate 1£ = $ 2
Net Profit 60000 Inventories 8000 FA acquisition rate 1£=$1.8
(Cost) Inventory 1£ = $ 2.5
Payables 10000 Receivables 30000 Closing rate 1£ = $ 2.8
90000 90000 Average rate 1£ = $ 2.4
The Functional currency of its Parent Company is $ as it is incorporated in USA, but it has opted for a different
Presentation currency i.e. ¥. Functional Currency of subsidiary is GBP.
The exchange rate between $ and Yens is given below:
Opening rate: 1$ = ¥106.30, Closing rate: 1$ = ¥106, Average rate: 1$ = ¥105. The shares were acquired by
the Parent company as on 1/4/2015.
You are required to update the above Balance Sheet of Zanoloma Inc for Consolidation purpose into the
Presentation Currency of its Parent Company.
Solution:
Step 1: Convert the B/S of Subsidiary from Foreign Currency £ to Presentation Currency ¥.
Step 2: Consolidate the Financial Statements.
Following is the Fx rate for GBP to YENS:
Opening : 1 GBP = YENS 212.60
Closing : 1 GBP = YENS 296.80
Average : 1 GBP = YENS 252.00
B/S of Subsidiary from Functional currency $ to Presentation currency ¥
Liabilities ¥ Assets ¥
Share Capital @296.80 59,36,000 Fixed Assets@ 296.80 1,54,33,600
Net Profit @ 105…… avg 1,51,20,000 Inventories @ 296.80 23,74,400
Payables @296.80 29,68,000 Receivables @ 296.80 89,04,000
Equity (bal) 26,88,000
2,67,12,000 2,67,12,000
All Monetary and Non – Monetary items at closing rate.
The balance in equity Yens reflects the Fx equity reserve A/c.
CASE LAW: For determining functional currency:
K Ltd is an Indian listed company engaged in providing IT outsourcing services in North America, Europe and
other countries. Other facts:
60-65% revenue is from US and remaining from other countries. No revenue from India is being earned.
Revenue earned is immediately converted into cash (`)
50-55% expenses (operating) incurred in India, 20-25% US and remaining in 4 other countries.
Loans raised in India. Only 10% of loans financed by US Capital hub. Share capital is fully generated in India.
Comment:
Solution: Significant portion of Operating costs is incurred in India. Employees may be paid in US but Salary
is not bench marked as per US market. Substantial part of total cost is government by Indian economic
environment.
Major revenue is earned from US market but it is an outsourcing business and US customer wants such
services. K Ltd is not only competing in US but also in other countries. Receipts are immediately converted
into INR.
Finance mostly by India Capital Channel.
Major Capital expenditure incurred in India.
Investors reside in India. Its share price movement is based on earnings in India.
Hence the functional currency of K Ltd is INR.
Problem 7: Harper Ltd is a parent of Small Ltd incorporated in India. H Ltd holds 80% in S Ltd. a US company:
In parent’s CFS the following amounts have been recognized for its investments in Sub:
Net assets: ` 1,00,000
Associated NCI (Minority int): ` 20,000
FCTR a/c. (OCI) ` 10,000 (including ` 2000 included in NCI)
Sale of entire 80% holdings: ` 1,30,000
Pass journal entries at CFS level in the books of Harper Ltd assuming:
(a) The functional currency of both the companies is INR.
(b) The functional currency of H is INR and S is USD.
Solution:
The functional currency of both the companies is INR. The functional currency of H is INR and S is USD.
Cash Dr ` 130000 Cash Dr ` 130000
NCI Dr 20000 NCI Dr 20000
Profit / loss a/c Dr 8000 OCI (FCTR) a/c Dr 8000
To Net assets 100000 To Net assets 100000
To Profit on disposal 58000 To Profit on disposal 58000

CHAPTER 12
IND AS 23: BORROWING COSTS
Chapter Outline
Ind AS-23 AS-16

Ind AS – 23 considers the borrowing costs based on Ind AS – 16 considers the borrowing costs based on
Effective Cost method…………also refer Ind AS – 109 Nominal Cost method.
Ind AS – 23 is not applicable to repetitive manufactured AS -16 has no such specific exclusion.
goods (inventories produced on large scale) and those
assets which are carried at fair value eg: biological asset.
In case of Hyperinflationary situation the borrowing cots Indian GAAP does not cover Standard on Hyper inflationary
related to the inflationary element is charged to income situation.
statement and not to be capitalized.
No guidance about substantial period of time is not Substantial period of time is generally 1 year.
provided i.e. it is based on judgment.
Ind AS – 23 wants the entity to disclose the Capitalization No such disclosure required.
rate.
Problem 1: Dipu Constructions took up an expansion project and the same was funded by a specific
borrowing 8% loan bonds of ₹ 100 crores. Loan bonds were issued at a discount of 1%. The entire loan will
be repaid at the end of 5 years. The entire project was ready by the end of the year calculate the borrowing
cost as per AS-16 and Ind AS – 23.
Solution:
As per Indian GAAP AS-16 BC = 100 x 8% + 1/5 (amortization of discount) = ₹ 8.20 crores
As per Ind AS – 23 / IAS – 23 the BC will be based on effective cost method:
Fair Value = PV of CFlows @ IRR
8 8 8 108
100-1 = + 2 + 2 +
(1+r) (1+r) (1+r) (1+r)2

By interpolation IRR or Effective Interest rate = 8.25%.
Borrowing costs to be capitalized = 99 crores x 8.25% = ₹ 8.17 crores.
Problem 2: Dhangar Ltd has a cattle field which serves the company milk, wool etc. The livestock is carried
at Fair Value. The opening fair value of livestock is ₹ 54,40,000. The closing fair value ₹ 67,33,000. Out of
which ₹ 2,00,000 worth was purchased during the year. Fresh borrowings were taken at the beginning of the
year to buy livestock. The total borrowings by the year end was ₹ 22,00,000 @ 12%. Calculate the borrowing
cost as per Ind AS – 23 and comment.
Solution:
Ind AS – 23 is not applicable on Assets carried at fair value. It is applicable on those assets which are carried
at cost less depreciation. Also further the assets should be qualifying assets. In the present case the entire BC
of ₹ 2,64,000 is charged to profit / loss account. BC should not be capitalized on biological assets.
Problem 3: Hyper Ltd is engaged in development of properties and further sell it in the open market. The
development process takes substantial period of time. It has financed its inventories by taking loan from
Yekoshore Development Bank € 75 million. The economy is under hyper inflationary situation. The interest
rate is 32%. The inflation is 200%. You are required to calculate the borrowing cost attributable towards the
capitalization of asset as per IAS – 23.
Solution:
Ind AS – 23: In case of Hyperinflationary situation the borrowing cots relate to the inflationary element is
charged to income statement and not to be capitalized.
Accordingly the effective (real element of) interest = 32% / 200% = 16%.
BC requires capitalization = 75 x 16% = € 12 million.
BC charged to P/L = 75 x 32% - 12 = € 12 million.
CHAPTER 13
IND AS 24: RELATED PARTY
Chapter Outline
vv Relationship between Person /
Individual / Human being Vs RE
Ind AS-24 AS-18

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

Somewhere AS-24 wants us to define related party based on the term influence. Ind AS-24 considers the
factor influence but also provides some specific names of relative.

(1) Definition of relative: Ind AS-24 defines relatives as: CLOSE FAMILY MEMBERS of a person
are those family members who may be expected to influence, or be influenced by, that person in
dealings with the entity : THEY INCLUDE:-
ww The person’s children (including step children), spouse or domestic partner;
ww Children (including step children) of the person’s spouse or domestic partner;
ww Dependents of the person or the person’s spouse or domestic partner
ww IND AS 24 uses the rule – based definition of “Relative” in the Companies Act 1956, (now
Companies Act 2013) though inclusion domestic partner, children of the domestic partner and
dependents of the domestic partner have been retained in IND-AS
(2) As per AS-18 State Controlled Enterprise (SCE) are Government controlled entity and are
exempted from disclosures. Ind As-24 provides a wider definition of SCE. It includes government
agencies, gvt dept, local govt, national govt as well as international govt.
(3) Compensation to Key Management Personnel: The same should be given in total and for each of
the following categories
ww Short term employee benefits
ww Post employment benefits
ww Other long term benefits
ww Termination benefits
ww Share based payments
(4) Analysis of Related Party (RP) relationship:
Control, Joint Control, Significance, JV , Subsidiary, Associates will carry the same meaning as covered
by AS-18. Specific analysis as per Ind AS 24 is as follows:
Rp as per ind as is that of person with reporting entity (re) and entity with re.
Relationship between Person / Individual / Human being Vs RE

(a) A PERSON OR A CLOSE MEMBER:
(i) Has Control OR joint control over the reporting entity;
(ii) Has significant influence over the reporting entity;
(iii) Is a Key management personnel of the reporting entity OR of a parent of the reporting entity.
(b) GROUP ENTITIES VS REPORTING ENTITY (RE):
The entire group of Holding, Subsidiary, Sub – subsidiary, Fellow Subsidiary are RPs. Here all entities
are related to each other. Fellow Subsidiary is the subsidiary under a common control with the RE.
Fellow Subsidiary is also known as Co-Subsidiary.
(c) PENSION AND OTHER POST EMPLOYMENT FUNDS:
Pension funds and similar post employment funds for the benefit of employees of the entity (or any
entity that is a related party to the entity), are related parties to the entity.
If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting
entity. Pension fund that is operated for the benefit of employees in a GROUP is a related party of
each entity.
IND AS 24: RELATED PARTY 58
(d) ASSOCIATES, JV VS REPORTING ENTITY (RE):

(i) Investors and their associates are related parties (direct relationship)
(ii) Venturers and their Joint Ventures are related parties (again direct relationship)
(iii) An entity being a Joint Venture of a third entity and the other entity being an associate of the same
third party, are related parties. In other words A JV and an Associate entity jointly controlled/
influenced by a common investor.(see diagrammatic presentation)
(iv) Two entities being joint ventures of the same third party are related parties (Fellow JVs)
(v) Where the reporting entity is member of a Group, an associate or Joint Venture of another entity,
also within the same Group, are related parties to the reporting entity.
(vi) Where a reporting entity has an associate or a Joint Venture, the Associate’s or Joint Venture’s
subsidiaries, will be related parties to the reporting entity.
(e) ENTITIES UNDER COMMON CONTROL / INFLUENCE BY A PERSON (OR CLOSE MEMBER):
(i) An entity is related to the reporting entity, If the person, control / jointly controls the reporting entity
also control / jointly control the entity.
(ii) An entity is related to the reporting entity, If the person controlling the reporting entity, has significant
influence over the other entity or is a KMP of the other entity.
DO YOU KNOW
Co – associates and Co – Venturer are not RPs.
Co-Venturer share joint control of a joint venture.
DO YOU KNOW
Co – associates carry common significance influence by an investor.
Ind AS – 24 treats a corporate investor and an individual investor in the same manner.
PROBLEM & SOLUTION
Problems 1: Vaste (P) Ltd has funded a Plan for Pension benefit. 3 more companies are members of such a
Plan. Annual transfer is almost for ₹ 4 crores. Is the Pension plan a related party as per Ind AS-24 as well as
AS-18.
Solution: Pension funds and similar post employment funds for the benefit of employees of the entity (or
any entity that is a related party to the entity), are related parties to the entity.
As per Ind AS-24 funded benefit plan is RP. But as per AS-18 it is not a RP.
Problems 2: A Ltd has 55% shares in B Ltd. B Ltd has 30% shares in C Ltd. Is B and C related to A Ltd.
Solution: Yes B is RP to A because of concept of Group. C Ltd is the Associate of the Group hence C is RP.
Groups Associates and Groups JV is is the RP of the entire Group …remember……………………Hindi mein
kahaawat hain….Ghar ki bhahi sabki bhabhi.
Problems 3: Mr Rahu is the brother of Mr Sahu. Mr Shahu has 22% shares in S Ltd. Is Mr Rahu a RP to S Ltd.
Solution: Yes. Entire Family is a RP if any one close member of family is a RP to the reporting entity. Here
Shahu has significant influence over S Ltd.
Problems 4: If Cov1 and Cov2 shares 50% each in a JV. Are the covertures related party.
Solution: Co – associates and Co – Venturers are not RPs.
Problems 5: Mr. Zuher & Mrs. Zuher jointly controls (30%+22%) à Vargeshe Firms Ltd. They also carry
significant influence in Rabujobhi Ltd with 33% shares. Is Rabujhogi Ltd a related party with Varegeshe Ltd ?
Solution: Rabujhogi Ltd a related party with Varegeshe Ltd.
Problems 6: Mr. Zuher & Mrs. Zuher have substantial interest in à Vargeshe Firms Ltd. They also have
substantial interest in Rabujhogi Ltd. Is Rabujhogi a related party with Varegeshe ? Is Mr. Zuher a RP to
Rabujhogi.
Solution: Here neither Rabujhogi Ltd is a RP with Varghese Ltd. nor Varghese Ltd is a RP with Rabujhogi
Ltd…………………….Two entities influenced by a common Individual / Close family are not RP.
Yes Zuher as a person is a RP with Rabujhogi Ltd.
Problems 7: Irokanka a partnership firm has only one Loan from Hi – si – tang Corp. The entire loan of
Irokanka is taken from Hi – si – tang Corp. Irokanka is highly dependent on Hi – si – tang for finance. Is Hi – si
– tang a RP with Irokanka.
Solution: Even in Indian GAAP a party on whom an entity has economic dependency is not a RP. Hence Hi –
si – tang is not a RP with Irokanka Firm.
Problems 8: H1 Ltd is holding 90% in H2 Ltd and H2 holds 55% in H3. H1 has a JV (JV1), H2 has an associate
(A1) , H3 has a Subsidiary (S1). Bring out all possible RP relationship with justification.
Solution :
Books of RP / Not a RP Reason
H1 Ltd.
H2 RP Group Entities
S1 RP Group Entities
JV1 RP JV of Group
A1 RP JV / Associate of Group Entities

H2 Ltd.
S1 RP Group Entities
JV1 RP JV / Associate of Group Entities
A1 RP Associate of H2 Ltd
Solution for H3 is same as H2 and H1 bit change in Reason .…………i.e all are RP.

IND AS 24: RELATED PARTY 60

S Ltd.
JV1 RP JV / Associate of Group Entities
A1 RP JV / Associate of Group Entities

JV1 Ltd.
H1 RP Being a direct investor.
H2 RP JV / Associate of Group Entities
H3 RP JV / Associate of Group Entities
S1 RP JV / Associate of Group Entities
A1 Not a RP Associates within the Group entities are not RP’s with JV / Associates
having different investor.
For A1 Ltd the solution is same as above. Again JV1 is not RP to A1.
Problems 9: Shri Vamajani is the father of Mr. Ubesh. Vamajani had 70% shares in Jekulu Inc. Mr Ubesh has
54% in Nomencultural Corp. Is Nome cultural Corp RP to Jekulu Inc. Comment?
Solution: Yes Shri Vamanjani as well as Ubesh both are RP to Jekulu as well as Nomencultural Corp. Also
Jekulu Inc and Nomencultural Corp. are also RP. Close members of family controls 2 entities.
Problems 10: Master problem on Individual holding 2 or more than 2 entities.
(a) Mr Sultan holds 23% shares in JANU Ltd and 25% shares in TITU Ltd.
Comment on Janu and Titu.
Solution: No RP exists between Janu and Titu………..co - associates are not RPs.
(b) Mr Sultan holds 23% shares in JANU Ltd and 60% shares in TITU Ltd.
Solution: Janu and Titu are RPs.
(c) Mr Sultan holds 60% shares in JANU Ltd and 60% shares in TITU Ltd.
Solution: Both Janu and Titu are RP. Two entities controlled by a common person or his close family members.
(d) Mr Sultan is a CEO (KMP) in JANU Ltd and holds 20% shares in TITU Ltd.
Solution: Janu and Titu are not RP.
CHAPTER 14
IND AS 33: EARNING PER
SHARE
Chapter Outline
vv Master sums on Consolidated & Stand Alone EPS
Ind AS-33 AS-20

Ind AS – 33 has abolished the disclosure of Extra – Ordinary As per AS – 20 EPS should be from Continuing and Ordinary
item. Hence EPS includes even extraordinary item. Activities……..para 32 of AS -20.
Ind AS – 33 requires EPS both as per continuing as well as AS – 20 EPS should be from Continuing and Ordinary
discontinuing operations separately. Activities……..para 32 of AS -20.
Ind AS – 33 also covered some advanced derivative items Not covered
like options on own shares, treasury stock, contingently
issuable shares.
Potential equity shares are dilutive or anti – dilutive based No mention.
on profit / loss from continuing operations.
It requires presentation of EPS both as per SFS and CFS No such mention in AS-20.
basis.
Impact of potential equity shares of the subsidiary, EPS on CFS basis is not warranted and hence not covered
associates and joint ventures are assessed. by AS-20.
In Ind AS- 32 Preference Shares are treated as a Financial Here actual preference dividend (cash) paid will be
liability (if redeemable). Accordingly the preference deducted.
dividend deducted from profits to get profits to equity
holders will be based on effective rate of return………….
Ind AS - 109.
No guidance on share application money pending Guidance provided for share application money as potential
allotment is being provided. equity shares
Contingently issuable shares: Contingently issuable No guidance on Contingently issuable shares.
ordinary shares are treated as outstanding and included
in the calculation of both basic and diluted EPS as if the
conditions have been met. Till the conditions are not
met, the number of contingently issuable shares is to be
included in the diluted EPS calculation.
DO YOU KNOW
Purchased Put and Call Options on own shares have an Anti – Dilutive effect on EPS? Put and Call Options sold
(writer) on own shares has a Dilutive effect on EPS.
DO YOU KNOW
For Bonus, Share split, prior period adj, change in accounting policy both diluted and basic EPS should be ret-
rospectively adjusted.
PROBLEM & SOLUTION
Problems 1: Manugelu Limited is a parent company of subsidiary Haluku Limited with 80% stake. For the
year 2015-16 Manugelu Limited earns net profit for equity ₹ 7,00,000 and Haluku earns profits of ₹ 2,00,000.
Manugelu Limited has 25,000 equity shares and Haluku Ltd has 10,000 equity shares. Compute EPS in the
books of 1) Manugelu Limited both as per SFS and CFS, 2) Haluku Limited only as per SFS.
Solution:
EPS of Manugelu for 2015-16:
(i) SFS: 700000 / 25000 = ₹ 28
(ii) CFS: (700000+200000 x 0.80) / 25000 = ₹ 34.40.
EPS of Haluku Limited = 200000 / 10000 = ₹ 20.
Problems 2: Kallapudesha Limited has 4,00,000 ordinary shares outstanding of face value ₹ 2 each. The
company has written call options on own shares 6,000. Premium is already received on call option ₹ 12. The
strike price was ₹ 100, The average market price ₹ 120. Total maturity of the option is 3 months.Net profit to
ordinary shareholder is ₹ 20,00,000. The options will be settled gross delivery based. Compute EPS.
Solution: EPS = 2000000 / 400000 = ₹ 5 /-……..basic EPS
Diluted EPS = 2000000 / 400000+ 1000 = ₹ 4.99 /-
Gross options 6000
Less: Shares for consideration (5000) (6000 x 100 / 120)
Shares for no consideration 1000
Problems 3: Cherry Berry Corp. has written put options on own shares 20,000 options. Premium is already
received on option ₹ 75. The strike price was ₹ 400, The average market price ₹ 250. Net profit for the year
2015-16 for ordinary shareholder is ₹ 76,42,000. On 1/4/2015 7,00,000 ordinary shares outstanding of face
value ₹ 100 each. On 1/12/2015 the company issued 3,00,000 equity shares. The options will be settled gross
delivery based. Compute EPS.
Solution: EPS = 76,42,000 / (700000 + 300000 x 4/12) = ₹ 9.55 /-……..basic EPS
Diluted EPS = 76,42,000 / 800000+ 12000 = ₹ 9.41 /-
Gross options (treasury shares) 20000
Less: Shares for consideration paid (32000) (20000 x 400/250)
Shares for which excess consideration paid 12000
Problems 4: Global Paints Ltd has purchased 60000 put options on own equity shares @₹ 600. The Fair
Value of the shares ₹ 450. Net profits attributable to the equity shareholders ₹ 36 crores. WANES 9,00,000.
Prove that purchased put options on own equity shares are always Anti – dilutive.
IND AS 33: EARNING PER SHARE 63
Solution: EPS = 360000000 / 900000 = ₹ 400/-……..basic EPS

Diluted EPS = 360000000 / 900000 – 20000 = ₹ 409.10 /- (anti – dilutive hence ignore).
The put options will be exercised only if the exercise price will be more than market price. In the present case
the no. of shares will be negative.
Gross options 60,000
Less: Shares sold at Fair consideration (80,000) (60000 x 600/450)
Shares for which excess consideration 20,000 (gain)……….gain expressed in shares.
Problems 5: Genistar Tubes Inc had issued 10% Preference shares of face value $ 10. Premium on
redemption will be 20% on the date of redemption (after 5 years). Corporate Dividend Tax 10%. Net Profits
after Tax $ 750 million and $ 790 million for 2016 and 2017 respectively. Number of equity shares 16 million
and preference shares 3 million. Compute Basic EPS. (hint IRR for Cash flows = 11.59%)
Solution:
Calculation of NP available to equity shareholders:
$ Millions $ Millions
PAT 750 790
Less: Preference Shares * (3.477) (3.53)
Less: CDT 10% x 10% x 3 x 10 (0.30) (0.30)
PAT – PDividend – PDTax 746.223 786.17
WANES = (millions) 16 16
Basic EPS as per Ind AS – 33 $46.64/- $49.14/-
Calculation of amortization:
PV of Cash flows = 30
Add: Effective cost 11.59% 3.477
Less: Cash flows (3)
Balance 30.477
Add: Effective cost 11.59% 3.53
Less: Cash flows (3)
Balance 31.01……….will continue
Notes: As per Financial Instruments – Presentation → Preference Shares are in substance a liability as they
are payable. CDT will be on a percentage of cash dividend.
Master sums on Consolidated & Stand Alone EPS

Problems 6: Following is the B/S of Holding Ltd. as on 31/3/2016.
H Ltd S Ltd JV Ltd A Ltd
Profits after tax 90,00,000 55,00,000 45,00,000 50,00,000
Equity dividends paid 12,00,000 8,00,000 6,00,000 6,00,000
Holding by H Ltd - 75% 30% 25%
Number of equity shares 720000 500000 320000 210000
Potential equity shares* 20,000 15,000 14,000 5,000
Savings on conversion of shares 9,000 Nil Nil Nil
Compute Basic and Diluted EPS both in case of SFS as well as CFS of H Ltd.
* Potential shares given are for no consideration. These are outside parties.
Solution: Books of H Ltd in SFS:
H Ltd S Ltd JV Ltd A Ltd

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

Net (a – b) 47,00,000 39,00,000 44,00,000
Share of H Ltd. (net off dividend) 3525000 1170000 1100000
H Ltd profits 90,00,000

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

Loss of profits due to PES:
S Ltd. 4700000 x -2.18% (102460)
JV Ltd. 3900000 x -1.26% (49140)
A Ltd. 1100000 x -.58% (25520)
Net Profits for Equity 14617880
WANES + PES = 740000
Diluted EPS (`) /- = ` 19.75

(WN) Loss of profits
S Ltd JV Ltd A Ltd
Existing Shareholding A 75% 30% 25%
Share in shares B 375000 96000 52500
Others holding C 125000 224000 157500
IND AS 33: EARNING PER SHARE 65
PES D 15000 14000 5000

Revised Others holding E=C+D 140000 238000 162500
Revised shareholdings 1-B/(B+D) 72.82% 28.74% 24.42%
Loss of stake % -2.18% -1.26% -0.58%
SFS CFS
SUMMARY OF EPS: Basic EPS 12.50 20.55
Diluted EPS 12.17 19.75
Notes: The additional shares of subsidiary, associates will not affect WANES for dilution. It will affect the
profits. This is because due to conversion of PES the additional shares will reduce the overall shareholding of
Holding Company.
CHAPTER 15
IND AS 34: INTERIM FINANCIAL
REPORTING (IFR)
Chapter Outline
Ind AS-34 AS-25

An IFR shall not be described as complying with Ind AS In case of AS-25 if an entity is required by regulator (SEBI)
unless it complies with all the requirements of Ind AS. or an entity can even voluntarily elects to prepare IFR, then
For ex: as per Clause 41 of SEBI regulations every listed it is enough for AS-25. This means even SEBI regulated
company should prepare IFR. This IFR is not in accordance (Clause 41) IFR is enough compliance of AS-25.
with Ind AS-34. IFR is voluntary / optional.
Either a complete set of accounts or condensed report Either a complete set of accounts or condensed report
is required. Condensed report includes Condensed B/S, is required. Condensed report includes Condensed B/S,
Condensed P/L, Condensed Cash flows, Condensed Condensed P/L, Condensed Cash flows. Condensed
Statement of equity. Statement of equity
If an entity reclassifies financial items, change a/c policy No mention about 3 B/S.
on retrospective basis then 3 balance sheets should be
prepared for comparative purposes. Actually this is a
requirement of Ind AS-1 itself which applies on Ind AS – 34.
In case of Ind AS-36 (Impairment) the G/W impaired cannot No such restriction.
be reversed. The same provision applies in Ind AS-34 i.e.
G/W not to be reversed from one interim period to another.
In case of Ind AS-34 a parent company need not include In case of AS-25 if a parent company prepares consolidated
separate financial accounts in addition to consolidated financial accounts in addition to separate financial accounts
financial accounts. then the same is even compulsory in IFR
In case of selected explanatory notes: Dividend paid In case of selected explanatory notes: Dividend information
information should be total or per share with reference to should be total or per share with reference to equity shares
equity shares and other shares separately. and other shares separately. It can be even in % form For Ex:
Example: Equity ` 200000, 10% Preference Shares ` 30000 Equity ` 200000, 10% Preference Shares ` 30000 or even per
or even per share will do. share will do. Alternatively it can be even in the following
way: Equity dividend 13%, Preference Shares 10%.
Contingent liabilities and Contingent assets both is required Only Contingent liabilities is to be disclosed. Contingent
to be disclosed (Ind As-37) assets should be ignored (AS-29)
Extraordinary items in accordance with Ind AS-1 deleted. Extraordinary items retained as per AS-5.
An IFR shall not be described as complying with Ind Ass No such mention.
unless it complies with all the requirements of Ind AS. IFR
prepared in accordance with Ind AS-34 or not prepared in
accordance with Ind AS-34 should be accordingly disclosed.
Example: IFR prepared in accordance with Ind AS-34 by an
entity is required to disclose this fact.
Changes in A/C policies should be in conformity with Ind Changes in A/C policies should be adjusted for previous
AS-8 i.e. the past interim accounts should be restated of the interim periods also of the same financial year.
same financial year. But in addition to it the entity should
also revise / restate the comparable last years financial
statements.
The impact of Convergence to marching towards New Ind No such change can be possible in AS-25.
As will have a substantial change in IFR.
Normally whenever we present IFR for the first time as per Normally whenever we present IFR for the first time as per
Ind AS-34 comparative information of last year is required. AS-25 comparative information of last year is not required
(exempted).
PROBLEMS & SOLUTION
Problem 1: Firru Polinic entity prepares quarterly interim financial reports in accordance with IAS 34. The
entity sells electrical goods, and normally 5% of customers claim on their warranty. The provision in the first
quarter was calculated as 5% of sales to date, which was ₹ 10 lakhs. However, in the second quarter, a design
fault was found and warranty claims were expected to be 10% for the whole of the year. Sales in the second
quarter were ₹ 15 lakhs. What would be the provision charged in the second quarter’s interim financial
statements?
Solution: Warranty provision in the second IFR = [10% of (10 + 15) – (5% of 10)], that is, ₹2 lakhs.
CHAPTER 16
IND AS 36: IMPAIRMENT OF
ASSETS
Chapter Outline
vv Is Ind AS – 36 applicable for CFS
Ind AS-36 AS-28

Scope excludes many assets. Scope excludes only a few assets
Even if there is no indication of any impairment, following No such provision. Generally impairment is to be conducted
assets should be tested for impairment annually: only if conditions for impairment exist……………build up
yy An intangible asset that has an indefinite useful life the wall only when it floods !
yy An intangible asset that is not yet available for use
yy Goodwill that has been acquired in a business
combination
Recoverable value is the higher of VIU or Fair Value less Recoverable value is the higher of VIU or Net Selling Price.
costs to sell. Fair value is defined in Ind AS-113. Fair Value is Net Selling Price is entity specific.
market oriented.
Ind AS-36 is applicable to even Investments in Subsidiary, AS-28 is silent on this.
JV and Associates in separate books of accounts.
Reversal of Goodwill (in case of reversal of impairment loss) In a very rare case G/W can be reversed under Indian GAAP.
is not allowed.
Goodwill is apportioned based on synergy gains of the Goodwill is apportioned based on bottom up and top
CGU. But it should not exceed the operating segment of a down approach.
company.

In principle an asset is impaired when an entity will not be able to recover the carrying amount of an asset
either through sale or by using it.
(1) Scope of Ind AS- 36
Exclusion includes a big list:
(a) inventories;
(b) assets arising from construction contracts;
(c) deferred tax assets;
(d) assets arising from employee benefits;

(e) financial assets;
(f) biological assets related to agricultural activity;
(g) insurer’s contractual rights under insurance contracts;
(i) non-current assets (or disposal groups) classified as held for sale.
Inclusion:
(a) tangible fixed assets
(b) intangible fixed assets;
(c) goodwill;
(d) assets held by lessee in finance lease;
(e) assets held by lessor in operating lease;
(f) investments made by parent company in its subsidiary, associates and joint ventures recorded
at cost in its separate financial statement.
Is Ind AS – 36 applicable for CFS

Ind AS – 36 is applicable even for CFS equity method i.e. Ind AS – 28 interests in associates and JVs.
Problem 1: Banuli Ltd has acquired 60% shares in Parmera Ltd.at ` 75,00,000. Net assets of P Ltd at the
time of acquisition was Rs 80,00,000. On 31/3/2015 Fair Value of net assets as on year ending estimated at
`1,00,00,000.
Required: Calculate impairment loss arising as on 31/3/2015, for the cash-generating unit assuming if
impairment indicators exist as well as if no impairment indicators exist.
Solution: if impairment indicators exist:
Cost of the investments = `75,00,000
Share in FV of Net Assets = ` 60,00,000 (60% of 1,00,00,000)
Impairment loss = Carrying Amount – Recoverable Value = 75 - 60 = ₹15,00,000.
Journal: ₹ ₹
Impairment loss A/C Dr 15,00,000 (Trf to P/L)
To Investments 15,00,000
Problem 2: How to test impairment of goodwill? How to allocate such impairment loss to CGU
and goodwill?
Solution: Goodwill should be tested for impairment annually.
To test for impairment, goodwill must be allocated to each of the acquirer’s cash -generating units, or groups
of cash -generating units that are expected to benefit from the synergies of the combination, irrespective of
whether other assets or liabilities of the acquire are assigned to those units or groups of units. Each unit or
group of units to which the goodwill is so allocated shall:
◘◘ represent the lowest level within the entity at which the goodwill is monitored for internal manage-
ment purposes; and
◘◘ not be larger than an operating segment determined in accordance with Ind AS 108
Operating Segments
A cash -generating unit to which goodwill has been allocated shall be tested for impairment at least annually by
comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit:
CHAPTER 17
IND AS 37: Provisions,
Contingent liabilities, Contingent
assets.
Chapter Outline
vv Accounting Standard vv Applicability of AS
vv AS and Auditors vv Companies Accounting Standard
vv Is AS Mandatory Rules (CASR) (2006)
vv Procedure of Issuing AS vv NACAS (National Advisory Committee for
Accounting Standard) or NFRA (National
vv Advantage and Significance of AS
Financial Reporting Standards)
Ind AS-37 AS-29

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

Site Restoration and Other Environmental Provisions
The Group provides for the costs of restoring a site where a legal or constructive obligation exists. The
cost of raising a provision before exploitation of the raw materials has commenced is included in property,
plant, and equipment and depreciated over the life of the site. The effect of any adjustments to the provision
due to further environmental damage is recorded through operating costs over the life of the site to reflect
the best estimate of the expenditure required to settle the obligation at balance sheet date. Changes in the
measurement of a provision that result from changes in the estimated timing or amount of cash outflows, or
a change in the discount rate, are added to, or deducted from, the cost of the related asset as appropriate in
the current period. All provisions are discounted to their present value based on a long-term borrowing rate.
Some important points on Ind AS – 37

(1) Discounting long term provisions: Site restoration costs to be capitalized to the cost of an asset. It is
incurred while the asset is installed. A provision at present value is required for the site restoration
cost on the other hand. Even other provisions are required to be discounted.
Illustration: Workers of a company filed a suit against the accident which recently took place in the premises
of the company. One fellow worker lost a hand in the accident. The company accepted the obligation but the
workers demanded a huge amount hence the case has been filed in the court. The company is ready to go to
the Supreme Court for exact compensation.
The experts regarding the case suggested a compensation of Rs. 10,00,000 to be provided. It is further
estimated that SC will dispose off the case over 6 years. Risk free rate is 6%. Compute the provision for the
first year.
Solution:
Year 1:
Profit / loss Dr 7,04,960 (10,00,000 / 1.066)
To Provision for compensation 7,04,960
(Being provision made for workers compensation at present value)
Discount (P/L) Dr 42,298 (704960 x 6%)
To Provision for compensation 42,298
(Being unwinding of discount)
(2) Constructive obligation: In accordance with Ind AS – 37, a constructive obligation derives from
an entity’s actions. It includes the valid expectation on the part of other parties, past practice,
announcements etc. Ultimately provision is required not only for legal obligation but also for
constructive obligation. Where else AS-29 considers legal obligation. Even though it does not
specifically excludes constructive obligation.
Example: constructive obligation: Workers of company X Ltd positively expects bonus in the month
of November as the company is highly profit making company. The company has to make a provision
even if no legal obligation arises. This is constructive obligation.
CSR is not a legal obligation for those companies not falling under the CSR provisions. Whether it is
a constructive obligation depends.
(3) Restructuring provision: Restructuring provision is made on constructive obligation. In contrast
AS 29 requires restructuring provision to be made based on legal obligation. For ex: A company
has made a public announcement to close a business or job curtailment has been announced for a
division. Of course discontinuing operations and provisions goes hand in hand.
Restructuring provisions should be accrued as follows

◘◘ Sale of operation: Accrue provision only after a binding sale agreement is entered. If binding agree-
ment is entered after balance sheet date, disclose but do not accrue.
◘◘ Closure or reorganization: Here few meetings are not enough. Accrue after a detailed forml plan is
prepared and announced publicly.
◘◘ Future operating losses: Future operating losses should not be recorded in any case.
IND AS 37: Provisions, Contingent liabilities, Contingent assets. 72
Readers refer the creative table……….The author has a patent for this table
ITEM RECOGNITION MEASUREMENT

ACCRUED EXPENSES Record as it is accrued Recorded with precision.
Example: wages accrued
ACCRUED INCOME Record as it is accrued subject to Recorded with precision.
Example: Revenue earned as per AS – 18 / AS 9 uncertainty
VALUATION GAIN Recorded only if it allowed by standard. Mostly estimated
Example: : forex gain on monetary item Ind AS Mostly unrealized (valuation) gains are
Ind AS 21 / AS-11 not recorded
VALUATION LOSS Mostly unrealized (valuation) losses Mostly estimated
Example: impairment of assets Ind AS 36 / AS- are recorded
28 ; NRV loss Ind AS 2 / AS-2
PROVISIONS Yes one has to record….Ind AS 37 / AS- Substantial estimation is
Example: warranty 29 required
CONTIENGENT LIABILITY Only requires a disclosure….Ind AS 37 Estimated if possible
Example: guarantees / AS 29
CONTIENGENT ASSETS Only requires a disclosure….Ind AS 37 N.A.
Example: claims pending in court for a but in AS 29 it is ignored
compensation
REMOTE LIABILITY Not even disclosed N.A.
Example: fake or baseless liability. Suit filed by a
party to just grab money
FUTURE INCOME Strictly prohibited i.e. recognition is N.A.
Example: next year’s sale of goods not permitted
FUTURE EXPENSES Strictly prohibited i.e. recognition is N.A.
Example: next year’s rentals not permitted
FUTURE OPERATING LOSS Strictly prohibited i.e. recognition is N.A.
Example: estimated loss on operations not permitted
ONEROUS CONTRACT Yes full recognition because the loss is Estimate the entire loss less
Example: Factory is closed but rentals are unavoidable……Ind AS -37 / AS-29 benefits if any.
payable till the expiry of contract.
PROBLEMS & SOLUTION
Problem 1: A Indian based shipping company lost an entire shipload of cargo valued at ₹50 lakhs on a
voyage to Australia. It is, however, covered by an insurance policy. According to the report of the surveyor the
amount is collectible, subject to the deductible clause (i.e., 10% of the claim) in the insurance policy. Before
year-end, the shipping company received a letter from the insurance company that a letter was in the mail
for 90% of the claim.
The international freight forwarding company that entrusted the shipping company with the delivery of the
cargo overseas has filed a lawsuit for ₹50 lakhs, claiming the value of the cargo that was lost on high seas,
and also consequential damages of ₹20 lakhs resulting from the delay. According to the legal counsel of the
shipping company, it is probable that the shipping company would have to pay the ₹ 50 lakhs, but it is a
remote possibility that it would have to pay the additional ₹ 20 lakhs claimed by the international freight
forwarding company, since this loss was specifically excluded in the freight forwarding contract.
Required: What provision or disclosure would the shipping company need to make at year-end?
Solution: The shipping company would need to recognize a contingent asset of ₹ 45 lakhs (the amount that is
virtually certain of collection……………refer theory of reimbursement). Also it would need to make a provision
for ₹ 50 lakhs towards the claim of the international freight forwarding company. Because the probability of
the claim of ₹ 20 lakhs is remote, no provision or disclosure would be needed for that.
Problem 2: Pratapta Zesty operates a fleet of 200 delivery vehicles. On 1 January 2018 legislation was
passed requiring all such vehicles to undergo modifications to reduce the amount of harmful emissions they
produce or face large ongoing financial penalties. The legislation require that modifications be completed by
31 March 2018.
The approximate cost of such modifications is ₹5,000 per vehicle. Pratapta Zesty has not yet modified any of
its vehicles.
The government has not yet imposed any penalties on Pratapta but the legislation indicated that the annual
penalty will be ₹4,000 per vehicle. This amount will be payable for every complete year from 1 April 2018
that modifications do not take place and vehicles continue to be operated. The penalty will be levied pro-rata
for any part year of non-compliance. Year ending is 30th September.
Solution: The key issue here is the extent of any provisions that need to be made in respect of the vehicle
modifications. This issue is governed by Ind AS 37- Provisions, contingent liabilities and contingent assets.
Ind AS 37 states that a provision is required where, at the reporting date:
◘◘ The entity has a present obligation arising out of a past event
◘◘ There is a probable future outflow of economic benefits
◘◘ The outflow can be estimated reliably.
A key factor in the above criteria is that the obligations must be unavoidable. As far as the modifications are
concerned although the legislation took effect from 31 March 2018 the vehicle have nevertheless been used
for six months in the current financial year so there cannot be any unavoidable obligation to modify them at
the reporting date.
One obligation that does appear to be unavoidable is the penalties that will become payable as a result of the
illegal use of the vehicles from the effective date of the legislation. Therefore a provision of 4,00,000 (200×4×6/12)
would be necessary due to the illegal operation of the vehicles for six months. This provision would be recognized
as a liability in the statement of financial position, with a charge of 4,00,000 in the income statement.
Problem 3: On 31 March 2018 Kallappa was in the process of defending a legal case brought against it for
damages caused due to the supply by Kallappa of faulty products. Kallappa’s lawyers provided the following
estimates of the likely outcome of the case:
A 70% chance of defending the case successfully.
A 20% chance of being required to pay ₹3 million in damages.
A 10% chance of being required to pay ₹5 million in damages.
The draft financial statements included a provision for ₹1.1 million(70% x nil + 20% x $3 million + 10% x $5
million). The charge in the statement of comprehensive income was made to administrative expenses.
The directors of Kappa have estimated that the legal costs of defending the case will total ₹4,00,000. ₹
3,00,000 of this has already been invoiced by the lawyers covering fees up to and including 31 March 2018.
Kallappa has included ₹ 3,00,000 in trade payables and charged ₹3,00,000 to administrative expenses, but
has not provided for the expected future costs of ₹1,00,000.
In the event of successfully defending the case, the directors of Kallappa believe there is a ‘good chance’ that
they will be able to recover their legal costs, but they have not yet reflected this fact in the draft financial
statements.
IND AS 37: Provisions, Contingent liabilities, Contingent assets. 74
Solution: Under the provisions of Ind AS 37- provisions, contingent liabilities and contingent assets- where
a single obligation is being measured the provision that is recognized should be for the most likely outcome.
In the case the most likely outcome is that the case will be successfully defended so no provision should
be made for possible damages, although the range of outcomes should be disclosed. Therefore 1.1 million
should be removed from administrative expenses.
As far as the legal costs are concerned these will be payable to the lawyers irrespective of whether or not
the case is successfully defended. The event giving rise to the legal claim, has occurred before the year end.
Therefore the full amount of the likely costs should be provided for and 1,00,000 added to administrative
expenses. The issue of a potential reimbursement needs to be considered separately. Ind AS 37 states that an
asset (and therefore a reduction in expenses) should only be recognized if reimbursement is virtually certain.
Therefore Kallappa is correct not to reflect this in the financial statements.
CHAPTER 18
IND AS 38: INTANGIBLE ASSETS
Chapter Outline
vv Most of the above points resemble vv Additional points in relation to Ind AS – 38.
with Ind AS-16 Vs AS-10. vv Web site development costs
Ind AS-38 AS-26

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

Differences between IAS-36 and IAS-36
(1) A change in Historical cost can undergo a change due to government grant (reduction of grant from
cost of the asset)…………IAS-16. Ind AS – 16 does not permit reduction of grant option towards the
cost of fixed asset. Hence Historical cost does not get affected by grants.
Similar to IAS vs Ind AS.

(1) Scope of Ind AS- 38:
The Standard is to be applied in accounting for all intangible assets except:
ww Those that are within the scope of another Standard
ww Financial assets as defined in Ind AS - 39, Financial Instruments: Recognition and Measurement
◘◘ Mineral rights and expenditure on the exploration for, or development and extraction of, minerals, oil,
natural gas, and similar non - regenerative resources
The Standard does not apply to those intangible assets covered by other Standards, such as
ww Intangible assets held for sale in the ordinary course of business (Ind AS 2)
ww Deferred tax assets (Ind AS 12)
ww Leases within the scope of Ind AS 17
ww Assets arising from employee benefit plans (Ind AS 19)
ww Financial assets covered by Ind AS 39, Ind AS 27, Ind AS 28, or Ind AS 31
ww Goodwill acquired in a business combination (Ind AS - 103)
ww Intangible assets arising from insurance contracts (Ind AS 104)
ww Noncurrent intangible assets classified as held for sale in accordance with Ind AS 105.
(2) Criteria for Recognition: Similar to Ind AS -16 also refer AS-26
(3) Measurement for Recognition: Similar to Ind AS -16 also refer AS-26
Concept of Research and Development is same as AS-26.
(4) Compensation for impairment: Similar to Ind AS -16
(5) Cost of an asset in case of “deferred” credit terms: Similar to Ind AS -16
(6) Measurement After Recognition: (Valuing Asset at Cost or Revalue Model). Similar to Ind AS -16
(7) Derecognition: Similar to Ind AS -16
(8) Revaluation provisions: Similar to Ind AS -16
(9) Amortization: Provisions regarding amortization is same as AS – 26.
IND AS 38: INTANGIBLE ASSETS 77
Additional points in relation to Ind AS – 38.

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

The advent of the Internet has created new ways of performing tasks that were unknown in the past. Most
entities have their own Web site that serves as an introduction of the entity and its products and services
to the world at large. A Web site has many of the characteristics of both tangible and intangible assets. With
virtually every entity incurring costs on setting up its own Web site, there was a real need to examine this
issue from an accounting perspective.
An interpretation in relation to —Web Site Costs.
SIC 32 lays down guidance on the treatment of Web site costs consistent with the criteria for capitalization
of costs established by IAS 38. According to SIC 32, a Web site that has been developed for the purposes of
promoting and advertising an entity’s products and services does not meet the criteria for capitalization of
costs under IAS 38. Thus costs incurred in setting up such a Web site should be expensed.
PROBLEMS & SOLUTION
Problem 1: Kasorabe Cabs acquired Taxi Cab card ₹ 1 crores. As government has limited the card holding
by only existing holders and no fresh cards will be issued the value will increases every year. Comment on
amortization as per AS-26 and Ind AS – 38?
Solution: AS – 26: Write – off over 10 years. Annual amortization = ₹ 10,00,000.
As per Ind As – 38 the company should follow Revaluation Model of upward revaluation. No amortization as
the asset has infinite life.
Problem 2: Pandaba Golon Ltd has a license costing ₹ 6,00,000 and patent costing ₹ 7,00,000. Active market
available for patents and not for license. Comment on valuation as per Ind AS – 38?
Solution: Patent should be valued at Revalued figure. License should be recorded at cost as the active market
is not available.
CHAPTER 19
IND AS 40 / IFRS 40:
INVESTMENTS PROPERTY
Chapter Outline
vv Objective of Ind AS-40 (Valuation on Balance sheet date)
vv Summarized table vv Fair Value Model and Recognition of Gains
vv Distinguishing characteristics and losses. (Relevant Only For IFRS)
of investment property vv Cost Model
vv Recongition of Investment property vv Disposals
vv Measurement at the point of Recognition: vv Difference between IAS – 40 and AS-13
vv Measurement After Recognition
Objective of Ind AS-40

This Standard prescribes criteria for the accounting treatment for, measurement and disclosures relating to,
investment property.
Scope: The Standard applies to: (i) the measurement in a lessee’s financial statements of investment property
held under a finance lease; (ii) the measurement in the lessor’s financial statements of investment property
leased out under an operating lease. However, all other aspects relating to leases, their accounting and their
disclosure, are dealt with in Ind AS 17, Leases.
The Standard does not deal with biological assets related to agricultural activity (see Ind AS 41) or to mineral
rights and mineral reserves such as oil, natural gas and similar non - regenerative resources (see Ind AS - 106).
Definition: (in accordance with Ind AS 40)
Investment property : Investment property is land or building, or both, held by the owner or the lessee under
a finance lease to earn rentals and/or for capital appreciation, rather than for use in production or supply of
goods and services or for administrative purposes or for sale in the ordinary course of business.
Owner-occupied property: Property held by the owner or the lessee under a finance lease for use in
production or supply of goods and services or for administrative purposes.
Special case of operating lease: (not applicable to Ind AS-40 but applicable to IAS-40)
Property interests held by a lessee under an operating lease may (i.e., it is optional) be classified and
recognized as an investment property if and only if the property would otherwise meet the definition of an
investment property and the property is measured using the fair value model (described later). This aspect
of recognizing investment property is a comparatively recent addition and was included in response to the
fact that in some countries, properties are held under long leases that provide, for all intents and purposes,
rights that are similar to those of an outright buyer. The inclusion in the Standard of such interests permits
the lessee to measure such assets at fair value as cost cannot be possible.
Summarized table
LAND AND BUILDING WHICH AS
Land and Building held as inventories (buying developing Ind AS- 2 (Inventories)
and selling for short term profits)
Land and Building held for production, storage, distribution, Ind AS- 16 (PPE)
services, administrative purpose
Land and Building held by Lessor under operating lease Ind AS-40 (only pattern of recognizing lease income is
covered by Ind AS-17)
Land and Building held by Lessee under finance lease Ind AS-16 (PPE)
àfurther the asset is used for production of goods
Land and Building held by Lessee under finance lease à Ind IAS-40
further the asset is used for rentals
Land and Building held by Lessee under operating lease Lessee never records asset under such a case
(further the asset is used for production of goods)
Land and Building held by Lessee under operating lease for Refer Special case of operating lease above
rentals
Distinguishing characteristics of investment property

◘◘ Investment property generates cash flows that are largely independent from other assets. The cash
flows have no connection with the actual business.
◘◘ In case of owner-occupied property the owner is actively engaged in the business activity. But in case
of investment property the owner relaxes (i.e. plays a very passive role).
◘◘ In case of owner-occupied property the owner is using the asset on a going concern basis hence gains
on revaluation is added to equity and not treated as realized gains. But in case of investment property
the revaluation gains is transferred to income account.
◘◘ It is purely held for rentals and long term capital appreciation.
◘◘ Hence investment property requires a distinct and separate set of accounting and disclosure principles.
Other issues
Part of the property held by owner for his business: In some instances, an entity occupies part of a property
and leases out the balance. If the two portions can be sold separately, each is accounted for appropriately. If
the portions cannot be sold separately, then the entire property is treated as investment property only if an
insignificant proportion is owner-occupied.
Precisely what is meant by “insignificant” is not defined and is left to judgment. However, in other Standards,
indications are that 2% may be an applicable level.
Owner is providing other services with the property: Sometimes a property owner provides ancillary
services, such as cleaning, maintenance, and security. Provided that such services are insignificant to the
arrangement as whole, then the property is an investment property.
In other cases—for instance, a hotel—services can be significant. In such case where the owner himself is
providing significant services other than letting out property then it is said that the property is used for
business. Ind AS-16 is applicable.
CFS level: An issue arises with groups of companies wherein one group company leases a property to
another. At group, or consolidation level, the property is owner-occupied. However, at individual company
level, the owning entity treats the building as investment property. Appropriate consolidation adjustments
would need to be made in the group accounts.
Property under construction: Earlier property under construction was accounted as Capital WIP Ind AS-
16. After the amendment to Ind AS-40 property under construction is now accounted as per Ind AS-40.
IND AS 40 / IFRS 40: INVESTMENTS PROPERTY 80
Case Study on Ind AS-40

Chandiwala Associates Limited (CA Ltd) and its subsidiaries have provided you a list of the properties they
own are as follows:
(a) Land held by CA Ltd for future sale after some 5 years
(b) A vacant building owned by CA Ltd and to be leased out under an operating lease
(c) Property held as a wing of real estate business
(d) Property held by CA Ltd as a Warehouse to store goods.
(e) A hotel owned by CA Ltd. and appointed an external party Lucky Firm for providing hotel management
services. CA Ltd is not responsible for the hotel services as it will be undertaken by Lucky Firm.
(f) Land, Building, Furniture fittings provided on rental basis.
(g) S1 a subsidiary of CA Ltd lets out a property to S2 again a subsidiary of CA Ltd under operating lease
basis.
(h) 50% Property is let out on rentals and 50% is used for services relating to consultancy. Also the
property cannot be separated.
(i) CA Ltd owns a property at Sangli costing ₹ 200 lakhs and market value ₹ 500 lakhs. The same is given
on finance lease to Baman Ltd.
(j) CA Ltd held a property in Gujarat for sale. 20% discount is offered.
Required
Advise CA Ltd. and its subsidiaries as to which of the above-mentioned properties would qualify under Ind AS
40 as investment properties. If they do not qualify thus, how should they be treated under Ind AS?
Solution:
(a) Ind AS-40 ;
(b) Ind AS-40 ;
(c) Ind AS-2 inventories;
(d) Ind AS-16 ;
(e) Ind AS-40. The hotel servies are not provided by CA Ltd. If CA Ltd was actively involved in hotel
services then it would be classified under Ind AS-16;
(f) Land, Building covered by Ind AS-40, but Furniture covered by Ind AS-16;
(g) For S1: Ind AS-40; For S2: Asset is not recorded ; For the Group CFS purpose: the property is classified
as owner occupied hence Ind AS-16 ;
(h) As significant property is used for own business it is not covered by Ind AS-40 ;
(i) Lessor cannot record the asset as per Ind As-17. CA Ltd cannot record property. Hencey no Ind AS – 40.
Recongition of Investment property

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

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

As per Ind AS – 40 an entity shall strictly recognize the cost model for all its investment property. Under IFRS
/ IAS cost or fair value method is adopted.
Fair Value Model and Recognition of Gains and losses. (Relevant Only For IFRS)
◘◘ If the fair model value is selected, after initial recognition, investment property shall be measured at
fair value. Fair value is the amount for which an asset could be exchanged between knowledgeable,
willing parties in an arm’s-length transaction.
◘◘ The FV should be based on market conditions on valuation date.
◘◘ Any gains or losses arising from changes in fair value shall be recognized in the income statement.
This is quite a radical divergence from previous practices.
◘◘ In addition, care needs to be taken as equipment, such as lifts, air conditioning, and the like, may be
recognized as separate assets. Valuations usually include such assets, which should not be double
counted.
◘◘ If, on acquisition, it is not possible to determine fair value reliably on a continuing basis, then the asset shall
be measured using the cost model under IAS 16 until disposal. Therefore, it is possible for an entity to hold
investment property, some of which is measured at fair value and some under the cost model.
◘◘ If an entity measures investment property at fair value, it shall continue to do so until disposal, even if
readily available market data become less frequent or less readily available.
Cost Model
An entity that selects the cost model shall measure all of its investment property in accordance with Ind AS
16’s requirements for that model except those classified as held for sale in accordance with Ind AS 105.
If the company decided to measure the investment property under the cost model it would have to account
for it under Ind AS -16 using the cost model prescribed under that standard (which requires that the asset
should be carried at its cost less accumulated depreciation and any accumulated impairment losses).
Therefore, when investment property is measured under the cost model, the fluctuations in the fair value of
the investment property from year to year would have no effect on the profit and loss account of the entity.
Instead, the annual depreciation which is computed based on the acquisition cost of the investment property
will be the only charge to the net profit or loss for each period (unless there is impairment which will also be
a charge to the net profit or loss for the year).
REMEMBER: FAIR VALUE IS NOT PERMITTED UNDER IND AS. IN OTHER WORDS WE ONLY ADOPT COST –
DEPN APPROACH.
Transfers
Transfers to and from investment property shall be made when there is change in the use:
Transfer from Transferred to Effect

investment property Owner occupied property Deemed cost for fixed asset will be the carrying
amount of IP
investment property Inventories Deemed cost for Inventories will be the carrying
amount of IP
IND AS 40 / IFRS 40: INVESTMENTS PROPERTY 82
Transfer from Transferred to Effect

Owner occupied property investment property IP will be at carrying amount of fixed asset
Inventories investment property IP initially held as inventory hence carried at original
cost or even NRV (no depreciation). It will be
transferred at (Cost – PFD). The difference between
Cost – PFD and value of inventory will be transferred
to P/L.
IP = investment property
Problem 1 : Ghasmen Property holdings engaged in buying and selling properties on large scale. Property
X purchased on 1/4/2014 @ $ 50,000 including all other expenses. Every year the NRV of the property was
20 – 25% more than Cost. The property will be depreciated over 25 years SLM, Salue Value = 40%.
On 1/4/2017 the entity decided to reclassify the Property X as investment property to be let out on rent
basis. Comment on the reclassification.
Solution:
Property X is an inventory hence the valuation will be at Cost / NRV which ever is less. But as the NRV is
always higher than the cost (as given in the problem) the inventory will be kept at Cost.
On 1/4/2017 for asset reclassification we should bring the asset to ( Cost - PFD ). Cost – PFD = 50000 – 1200
x 3 = $ 46,400.
Entry:
P/L Dr 3600
To Property X 3600
Disposals
An investment property shall be derecognized on disposal or at the time that no benefit is expected from
future use or disposal. Any gain or loss is determined as the difference between the net disposal proceeds and
the carrying amount and is recognized in the income statement.
Difference between IAS – 40 and AS-13

AS-13 only provides mere definition of investment property. Ind AS - 40 deals with property investments in
detail.
CHAPTER 20
IND AS 41 / IAS 41:
AGRICULTURE
Chapter Outline
vv Scope of the Standard: Asset and Agriculture produce
vv Some relevant Definitions vv Comment whether the following
vv INTERESTING FACTS cases falls under Ind AS-41
vv Special discussion on Bearer Plant vv Assuming Fair Value Is Not Determinable:
vv Recognition and measurement for Bearer Plant vv Government Grants:
vv Measurement initially and even vv Unconditional grant

subsequent recognition of Biological vv Presentation:
Objective: Initially when there was no AS on Agriculture, entity use to recognize Agricultural assets at Cost.
Hence a need arises to set common principles for accounting in Agriculture Sector too.
Scope of the Standard:

Ind AS-41 does include accounting for
Biological Assets (BA), 2) Agricultural Produce (AP) not yet harvested, 3) Government Grants received for BA.
Ind AS-41 is not applicable to

Land used for BA, 2) Intangible Assets arising out of BA, 3) Agricultural Produce after they are harvested.
Example: Keshav Farms have cattle field worth € 7,00,000, Land owned for cattle field € 4,50,000. Land
owned for BA will be covered by Ind AS – 16 (PPE).
Some relevant Definitions

Biological Assets: It includes plants and animals living at present. Ex: 10 buffaloes kept for yielding milk.
10 buffaloes are biological assets. 200 Animals are kept in Zoo for entertainment to the public. This is not BA.
No agricultural produce can be obtained from it. BA should be held for any of the purpose mentioned below:
Producing any other BA, Producing AP, BA held for sale.
Agriculture Activity: It is the management of Biological Transformation, management of Harvest of BA,
management of Conversion into agricultural produce, management of conversion into additional Biological
assets. Milk from a goat is Agricultural produce and the procedure of yielding milk is an Agricultural Activity.
Feeding of animals is also agricultural activity.
Biological Transformation: Relates to the processes of growth (calves grow into mature cow), degeneration
(beef cattle are slaughtered), and procreation (calves are born) that causes changes of quantitative or
qualitative nature in a biological asset.
Agricultural produce: The harvested product of the entity’s biological assets, for example, milk and coffee
beans.
Harvest: It is the detachment of agricultural produce from a BA or cessation of life of BA.
Consumable Biological Assets: These are BA which gets destroyed / extinguished after they are harvested.
Example: Livestock for meat, Fish, crops like wheat which are known as annual crops.
Bearer Biological Assets: These are BA which stay even after the agricultural activity or they are self –
regenerating assets. Ex: Livestock for milk, Standing trees carrying fruits.
Do you know:
Till Agricultural produce is not harvested from biological asset Ind AS-41 is applicable. But once it is harvested
Ind AS-2 will be applied. The (FV – Cost) at the point of sale becomes deemed cost for Ind AS-2
Refer the table
IND AS 41 / IAS 41 : Agricultural Produce Ind AS – Agri Produce Ind AS- 2
AGRICULTURE 41 (till it is not harvested)
Sheep Wool Blanket
Trees Fruits Juice
Cotton plants Cotton Cloth
Dairy cattle Milk Curd, Cheese
Pigs Carcass Sausages
Oil palms Picked fruit Palm Oil
Beef Meat Cooked and processed meat
THINGS TO REMEMBER
Ind AS-41 is applicable to the BA and Agricultural produce till the point of harvest only. Further processing of
agricultural produce is not covered by Ind AS-41. For Ex: Mangoes are processed into pulp as such pulp is not
covered by IND AS 41. It is covered by Ind AS-2. Also the mangoes once plucked from the trees will be covered
by Ind AS-2. Interestingly they are not valued as per Ind AS-2 but valued at Fair Value under forward sale.
INTERESTING FACTS
SHEEP (BIOLOGICAL ASSET) : Ind AS-41……valued at Fair Value less estimated point of sales.
SHEEP WITH WOOL (BIOLOGICAL ASSET) : Ind AS-41……valued at Fair Value less estimated point of sales.
ONLY WOOL (AGRI PRODUCE): Ind AS – 2……….valued at NRV
BLANKET FROM WOOL (PRODUCT): Ind AS – 2………valued at Cost or NRV whichever is less.
THINGS TO REMEMBER
Agriculture is distinguished from “pure exploitation,” where resources are simply removed from the environ-
ment (e.g., by ocean fishing or deforestation) without management initiatives such as operation of hatcheries,
reforestation, or other attempts to manage their regeneration.
IAS 41 sets forth a three-part test or set of criteria for agricultural activities. First, the plants or animals which
are the object of the activities must be alive and capable of transformation.
Second, the change must be managed, which implies a range of activities (e.g., fertilizing the soil and weed-
ing in the case of crop growing; feeding and providing health care in the instance of animal husbandry; etc.).
Third, there must be a basis for the measurement of change, such as the ripeness of vegetables, the weight of
animals, circumference of trees, and so forth. If these three criteria are all satisfied, the activity will be impacted
by the financial reporting requirements imposed by IAS 41.
IND AS 41 / IAS 41: AGRICULTURE 85
Special discussion on Bearer Plant

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

(1) Unlike other Biological Asset or Agriculture produce the Bearer Plants are not recorded at FV. All
bearer plants are recorded at COST (Similar to IND AS – 16 PPE). It’s not wrong to say that Bearer
Plants are Fixed assets as per Ind AS16.
(2) Before maturity Bearer Plants are accounted like a self - constructed asset i.e. accumulate
cost……………………….same as Ind AS - 16
(3) After the maturity is attained Bearer Plants are accounted @cost or revaluation model ……………….
same as Ind AS - 16
(4) Depreciation will be based on remaining useful life ….…………….same as Ind AS - 16 or Schedule II
(5) Impairment of Bearer Plants will be governed by Ind AS-36 and not Ind AS-41.
(6) Government grants as per Ind AS-20 and not as per Ind AS-41.
Do you know à Bearer plants are biological assets but not covered by Ind – AS-41 for recognition,
valuation etc.
Initial Recognition of Biological Asset and Agriculture produce (except Bearer Plant): An asset can be
recognized as a Biological Asset or Agriculture produce when all the conditions are satisfied:
◘◘ Asset should arise out of past event, benefits should be controlled by the entity (legal ownership / by
purchasing from the market / embossing birth marks);
◘◘ Economic benefits should flow to the entity
◘◘ Fair Value or Cost (if FV not possible) should be reliably measured.
Measurement initially and even subsequent recognition of Biological Asset and

Agriculture produce
ASSUMING FAIR VALUE IS DETERMINABLE:
Biological Asset should be measured at Fair value less estimated point of sale costs.
Agriculture produce harvested from an entity’s biological assets shall be measured at Fair value less estimated
point of sale costs.
Point of sale costs: Includes commissions to brokers and dealers, levies by regulatory agencies / commodity
exchanges, all duties and duties. It does not include transport costs.
Example: 5 goats are purchased at ₹ 27000. Transport charges ₹ 500. Auctioneers fees 1% of sales value.
Cost of goats = ₹27000. FV – estimated point of sale costs = 27000 – 270 = ₹26730. 5 goats will be recorded
at ₹26730.
Recognition of gains / loss: Initial as well as year ending difference will be transferred to P/L account. Ex:
5 goats are purchased at ₹ 27000 on 1/1/2016. Transport charges ₹ 500. Auctioneers fees 1% of sales value.
Cost of goats = ₹27000. FV – estimated point of sale costs = 27000 – 270 = ₹26730. 5 goats will be recorded
at ₹26730.
1/1/2016 Livestock Dr 27500
To Cash 27500
P/L Dr 730
To Livestock 730 (27500-26730) Assets now carried @FV
Suppose on 31/3/2016 Value of each goat is ₹6300. Transport charges to sell ₹ 700. Auctioneers fees
1.1% of sales value.
31/3/2016 Livestock Dr 4423 (6300*5 – 347) - 26730
To P / L Dr 4423
*Transport charges on sale is ignored as no actual sale took place. Also Ind AS-41 excludes transport costs as
a deduction from FV.
Suppose on 31/3/2017 Value of each goat is ₹7200. Transport charges to sell ₹ 800. Auctioneers fees 1.2%
of sales value. 1 goat dead by giving birth to 2 goats. Value of small goats on 31/3/2017 is 25% of the value
of matured goats.
31/3/2017 Livestock Dr 851 (7200*4+7200*0.25*2) – 1.1% Fees) - 31193
To P / L Dr 851
Comment whether the following cases falls under Ind AS-41

Problem 1: Managing activities for keeping animals in Zoo ; 2) Animals in Game park ; 3) Animals in Circus
; 4) Natural Breeding of animals in Zoo ; 5) Managed breeding for programme to sell animals ; 6) Ocean
fishing; 7) growing plants for use in research ; 8) growing plants for sale ; 9) Land purchased for farming ;
10) growing plants to produce another plants ; 11) Fish processing and packing; 12) Annual crops wheat ;
13) Milk ; 14) Hens in poultry farm ; 15) Eggs laid down by Hens, 16) Chickens; 17) managing fish activity
to slaughter further; 18) plucked flowers, 19) unplucked flowers
Solution: No ; as it is neither for sale nor for producing agriculture produce nor for producing another
biological asset. 2) same as 1, 3) same as 1, 4) No Its unmanaged breeding hence not covered by Ind AS-41,
5) Yes biological asset for sale, 6) Harvesting biological assets from unmanaged activity is not an agricultural
activity, 7) No same as 1, 8) Yes, even plants are biological asset (living things), 9) Land is scoped out of Ind
AS-41, 10) Yes biological asset used to generate another biological asset, 11) Not an agricultural activity. Fish
processed products covered by Ind AS-2 as inventory as they are the produce and not agriculture produce.
But only Fish is a biological asset, 12) Yes; They are biological assets; 13) Milk we yield from biological asset
hence it is an agriculture produce at the point of harvest; Beyond point of harvest it is inventory; 14) Yes it
is a biological asset; 15) No; after eggs are laid it is inventory. It is agricultural produce only at the point of
harvest ; 16) Yes; biological asset ; 17) Yes ; 18) No; agriculture produce only at the point of harvest; 19) Yes;
unplucked flowers are not yet harvested and hence agriculture produce.
Problem 2: Is a pregnant ewe (female sheep) a biological asset. What about the offspring (lamb)? When it
will be recognized?
Solution: Yes a pregnant sheep is a biological asset (living animal). Baby lamb is also a biological asset
(living animal). It is not an agriculture produce but another biological asset. Baby lamb will be recorded once
it is born.
IND AS 41 / IAS 41: AGRICULTURE 87
ASSUMING FAIR VALUE IS NOT DETERMINABLE:

It is always presumed that the fair value is always reliably measured. But if FV is not reliably measured then
the biological asset and agriculture produce should be measured at COST – PFD – Impairment losses.
Government Grants:
◘◘ A government grant that is related to a biological asset measured at fair value less estimated point-of-
sale costs should be recognized as income when the government grant becomes receivable.
◘◘ For unconditional grants immediate recognition is allowed. If there are conditions attached to the
government grant, then the government grant shall be recognized only when those conditions are
met.
◘◘ Ind AS 20 is to bearer plant.
◘◘ Ind AS 41 does not deal with government grants that relate to agricultural produce. These grants may
include subsidies. Subsidies are normally payable when the produce is sold and would therefore be
recognized as income on the sale.
◘◘ Ind AS-41 does not deal with Capital or Deferred Approach unlike Ind AS-20.
Unconditional grant
Ex: Value Ltd is engaged in organic farming. It receives ₹3,00,000 grant every year. This grant will be
immediately recorded as no condition is attached towards the grant.
Conditional grant:
Ex: Value Ltd is engaged in farming of bajra of special kind. It receives ₹40,00,000 grant initially on a condition
that a certain quantity of bajra has to be produced in aggregate period of 3 years. This grant will be recorded
only after 3 years. If a certain quantity is not achieved then the grant has to be refunded. The entity has to
disclose a contingency on grant about the return of grant.
Presentation:
Current and Non – Current classification is possible even in Ind AS-41.
From Page No. 87,88,89. Master Problem
CHAPTER 21
Ind AS- 105 NONCURRENT
ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
Chapter Outline
vv Accounting Standard vv Applicability of AS
vv AS and Auditors vv Companies Accounting Standard
vv Is AS Mandatory Rules (CASR) (2006)
vv Procedure of Issuing AS vv NACAS (National Advisory Committee for
Accounting Standard) or NFRA (National
vv Advantage and Significance of AS
Financial Reporting Standards)
Ind AS-105 AS-24

Known as Non - Current asset held for sale and discontinued Known as Discontinuing operations (DO).
operations (NCA HFS and DO)
Quite broad coverage. Narrow coverage only.
Includes discontinuing as well as discontinued operations. Covers only discontinuing operations.
No mention about cash flows Vs (NCA HFS and DO). If an entity prepares cash flow statement then the statement
of cash flow should include cash flows related to DO.
Assets held for sale should be sold within 1 year (with some No such period. Discontinuing operations can even take
exceptions kept aside). some 2-3 years no problem.
Initial disclosure event is not defined. Initial disclosure event is very well defined…….please
refer AS-24.
Valuation for assets held for sale will be lower of carrying DO have to depreciated as usual / impaired as usual when
amount and fair value less costs to sell. Depreciation stops it is still not discontinued.
once the asset is reclassified as HFS.
Abandonment of assets is not NCA HFS. Abandoned assets are one of the methods to discontinue
the assets.
Guidelines on Plan to sell the assets given in detail. No such guideline is being provided.
Subsidiary exclusively held for sale is covered under the Sale of subsidiary is not covered.
definition of DO.
Detail discussion on Ind AS-105

Scope
The purpose of Ind AS – 105 is to specify the accounting for assets held for sale and the presentation and
disclosure of discontinued operations.
Some Definition
Assets held for sale: Assets held for sale is a noncurrent asset whose carrying amount will be recovered
mainly through selling the asset rather than through usage.
Disposal group: A group of assets and possibly some liabilities that an entity intends to dispose of in a single
transaction. It may be even a CGU (as defined in Ind AS-36) as well as Goodwill allocable to such CGU.
For classifying a noncurrent asset or disposal group as held for sale, following conditions are necessary:
(1) the asset must be available for immediate sale in its present condition and its sale must be highly
probable.
(2) the asset must be currently being marketed actively at its current fair value.
(3) the sale should be completed, or expected to be so, within a year from the date of the classification.
Classify the following into HFS: Ind AS – 105

(1) A property given on rental ;
(2) A vehicle not in use for which potential buyer is being looked for ;
(3) One of activity carries 3 assets and 1 liability is being advertised for sale (liability has to be taken
along with the asset). Sale is at 40% discount ;
(4) Property held for sale and a binding agreement is entered to sell the asset after 3 years ;
(5) 50% of investment property is held for sale ;
(6) Entire investments in JV is held for sale ;
(7) An entity is committed to a plan to sell a building and has started looking for a buyer for that building.
The entity will continue to use the building until another building is completed to house the office
staff located in the building. There is no intention to relocate the office staff until the new building is
completed.
(8) XYZ has purchased a property and decided to renovate it an even install the lift inside the building.
Once the building is ready it will be sold.
Solution 1:
(1) Not HFS,
(2) Yes HFS
( 3) Yes it is a disposal group we further assume that the group must be available for immediate sale in
its present condition and its sale must be highly probable.
(4) No because the non – current asset will be sold within 1 year. It has to be sold with 1 year.
(5) Yes it is a non - current asset HFS, further assume that the asset must be available for immediate sale
in its present condition and its sale must be highly probable.
( 6) Same as 5
(7) The building will not be classified as held for sale as it is not available for immediate sale. 8) Not
covered by Ind AS – 105: The asset must be available for immediate sale in its present condition.
Evidences to prove that the management is committed to sell the asset

◘◘ The actions required to complete the planned sale will have been made, and it is unlikely that the plan
will be significantly changed or withdrawn.
◘◘ For the sale to be highly probable, management must be committed to sell the asset and must be
actively looking for a buyer.
◘◘ It is possible that the sale may not be completed within one year. In this case, the asset could still be
classified as held for sale if the delay is caused by events beyond the entity’s control and the entity is
still committed to selling the asset.
Ind AS- 105 NONCURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS 90
Situations where an extension of the period required completing the sale are
allowable
Even if the NCA HFS extend beyond one year it is still considered under Ind AS-106:
(a) The entity has committed itself to sell a noncurrent asset, and it expects that others may impose
conditions on the transfer of the asset and where the conditions could not be completed until after
a firm purchase commitment has been made and a firm purchase commitment is highly probable
within a year.
(b) A firm purchase commitment is made but a buyer unexpectedly imposes conditions on the transfer
of the noncurrent asset held for sale. Timely actions should be taken to respond to the conditions,
and a favorable resolution is anticipated.
(c) During the one-year period, unforeseen circumstances arise that were considered unlikely, and the
noncurrent asset is not sold. Necessary action to respond to the change in circumstances should be
taken.
Case Study
1. Facts
An entity is planning to sell part of its business that is deemed to be a disposal group. The entity is in a
business environment that is heavily regulated, and any sale requires government approval. This means that
the sale time is difficult to determine. Government approval cannot be obtained until a buyer is found and
known for the disposal group and a firm purchase contract has been signed. However, it is likely that the
entity will be able to sell the disposal group within one year.
Required: Would the disposal group be classified as held for sale?
Solution: The disposal group would be classified as held for sale because the delay is caused by events or
circumstances beyond the entity’s control and there is evidence that the entity is committed to selling the
disposal group.
2) Facts
An entity has an asset that has been designated as held for sale in the financial year to 31/12/2015. During
the financial year to 31/12/2016, the asset still remains unsold, but the market conditions for the asset have
deteriorated significantly. The entity believes that market conditions will improve and has not reduced the
price of the asset, which continues to be classified as held for sale. The fair value of the asset is ₹50,00,000,
and the asset is being marketed at ₹75,00,000.
Required
Should the asset be classified as held for sale in the financial statements for the year ending 31/12/2016?
Solution
Because the selling price is in excess of the current fair value, the asset is not available for immediate sale and
should not be classified as held for sale.
Other important points
◘◘ Exchanges of noncurrent assets between companies can be treated as held for sale when such an
exchange has a commercial substance in accordance with Ind AS 16.
◘◘ Occasionally companies acquire noncurrent assets exclusively with a view to disposal. In these cases,
the noncurrent asset will be classified as held for sale at the date of the acquisition only if it is antici-
pated that it will be sold within the one-year period and it is highly probable that the held-for-sale
criteria will be met within a short period of the acquisition date. This period normally will be no more
than three months.
◘◘ If the criteria for classifying a noncurrent asset as held for sale occur after the balance sheet date,
the noncurrent asset should not be shown as held for sale. However, certain information should be
disclosed about the noncurrent assets.
◘◘ Non - Current assets or disposal groups that are to be abandoned do not meet the definition of held
for sale. “Abandonment” means that the noncurrent asset (disposal group) will be used to the end
of its economic life, or the noncurrent asset (disposal group) will be closed rather than sold. The
reasoning behind this is because the carrying amount of the noncurrent asset will be recovered prin-
cipally through continued usage. However, a disposal group that is to be abandoned may meet the
definition of a discontinued activity.
Measurement of Non – Current Asset or disposal group held for sale

RULES FOR MEASUREMENT
Before classifying into HFS:
Just before an asset is initially classified as held for sale, it should be measured in accordance with the
applicable Ind AS. For ex: Investment property should be valued at cost less depreciation as per Ind AS-40.
From the date they classified into HFS: When noncurrent assets or disposal groups are classified as held for
sale, they are measured at the lower of the carrying amount and fair value less costs to sell.
The measurement provisions of this Ind AS do not apply to deferred tax assets, assets arising from employee
benefits, financial assets within the scope of Ind AS 39, noncurrent assets accounted for in accordance with
the fair value model in Ind AS 40, noncurrent assets that are measured at fair value less estimated point-of-
sale costs under Ind AS 41, and contractual rights under insurance contracts as defined in Ind AS - 104.
When the sale is expected to occur in over a year’s time, the entity should measure the cost to sell at its
present value. Any increase in the present value of the cost to sell that arises should be shown in profit and
loss as a finance cost.
Example: A plant’s FV is ₹ 4,00,000 and costs to sell is ₹ 20,000. The IRR is taken as 10%. The plant
would be expected to be sold after at the end of 1 year may be beyond that. The FV – costs = 4,00,000 – PV
of 20,000 = ₹ 4,00,000 – 18,182 = ₹ 3,81,818.
The difference between the carrying value and the fair value less costs will be treated as impairment loss is
recognized in profit or loss on any initial or subsequent write-down of the asset or disposal group to fair
value less cost to sell. Any impairment loss recognized for a disposal group should be applied in the order set
out in
Ind AS - 36
Any subsequent increases in fair value less cost to sell of an asset can be recognized in profit or loss to the
extent that it is not in excess of the cumulative impairment loss that has been recognized in accordance with
Ind AS- 105 or previously in accordance with Ind AS 36.
Noncurrent assets or disposal groups classified as held for sale should not be depreciated.
Change of plan: (These provisions are similar to Ind AS-36)
◘◘ If criteria for an asset to be classified as held for sale are no longer met, then the asset or disposal
group ceases to be held for sale.
◘◘ In this case, the asset or disposal group should be valued at the lower of the carrying amount before
the asset or disposal group was classified as held for sale (as adjusted for any subsequent deprecia-
tion, amortization, or revaluation) and its recoverable amount at the date of the decision not to sell.
◘◘ Any adjustment to the value should be shown in income from continuing operations for the period.
◘◘ If an asset is removed from a disposal group, the disposal group will continue to be classified as such
only if it still meets the criteria set out in the Standard.
Disclosure of Non – Current Assets:

Noncurrent assets held for sale and assets of disposal groups must be disclosed separately from other assets
in the balance sheet. The liabilities must also be disclosed separately in the balance sheet. Assets and liabilities
cannot be offset and shown as a single amount.
-------------------------
Balance sheet:
Liabilities: Assets
Non Current liabilities xxx Non Current assets xxx
Currents liabilities Currents Assets
NCA – Held for sales xxx NCA – Held for sale xxx
DISCONTINUED OPERATIONS: PRESENTATION AND DISCLOSURE

A discontinued operation is a part of an entity that has either been disposed of or is classified as held for sale
and:
(a) Represents a separate major line of business or geographical area of operations;
(b) Is part of a single coordinated plan to dispose of separate major line of business or geographical area
of operations; or
(c) Is a subsidiary acquired exclusively with a view to resale.
Schedule III of the Companies Act 2013 provides for a single line disclosure of profit / loss after tax from
discontinued operations.
Also the after-tax gain or loss recognized on the measurement to fair value less cost to sell (or on the disposal)
should be presented as a single figure (impairment).
Ind AS - 105 requires detailed disclosure of revenue, expenses, pretax profit or loss, and the related income
tax expense, either in the notes or on the face of the income statement. If this information is presented on
the face of the income statement, the information should be separately disclosed from information relating
to continuing operations.
Cash flows: Regarding the presentation in the cash flow statement, the net cash flows attributable to the
operating, investing, and financing activities of the discontinued operation should be shown separately on
the face of the statement or disclosed in the notes. Any disclosures should cover both the current and all
prior periods that have been shown in the financial statements. Retrospective classification as a discontinued
operation where the criteria are met after the balance sheet date is prohibited.
If the entity ceases to classify a component as held for sale, the results of that element must be reclassified
and included in income from continuing operations.]
DO YOU KNOW
An abandoned disposal group cannot be non – current asset held for sale because its carrying amount will be
recovered through continuing use. It may be classified as a discontinuing operation.
PROBLEM & SOLUTION
Problem 1: On February 2016 the directors decided to close down a business segment. The decision
was taken out of the desire to refocus on the strategic direction of the group. On 14/3/2016 the same was
communicated to the relevant parties with a view to terminate existing contracts and arrange for the sale of
assets. Latest estimates of the financial implications of the closure are as follows:
Plant having a net book value of ₹ 12,00,000 on 31/3/2016 will be sold for ₹ 1,00,000.
A freehold property having a net book value of ₹ 10,00,000 on 31/3/2016 will be sold for ₹ 15,00,000.
Inventory valued at ₹ 3,00,000 (Cost ₹ 3,20,000).
Solution:
As far as the non-current assets of the segment are concerned they satisfy the Ind AS 105 criteria for assets
held for sale. An asset is classified as held for sale if its value will be recovered principally through sale
as opposed to continuing use. The implications of this classification is that the plant and property will be
classified as held for sale on the balance sheet and measured at the lower of existing carrying value and fair
value less costs to sell. This means that the plant and equipment will be written down by ₹11,00,000 but
that the property will continue to be carried at ₹10,00,000 (remember whichever is less) even if you revalue
otherwise at fair value.. Under the principles of IFRS 5 it would be correct to show the results separately if
the segment can be regarded as a discontinued operation. In order for this to be the case the segment would
have to be:
A component of the entity (where operations and cash flows can be clearly distinguished, operationally and
for financial reporting purposes, from the rest of the entity) that either has been disposed of or is classified
as held for sale and:
◘◘ Represents a separate major line of business or geographical area of operations; or
◘◘ Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical
area of operations; or
◘◘ Is a subsidiary acquired exclusively with a view to resale.
In this case it appears that the segment would be regarded as a discontinued operation. This means that the
company needs to disclose a single amount on the face of the income statement comprising the total of:
◘◘ The post-tax profit or loss of the discontinued operation and
◘◘ The post-tax gain or loss recognized on the measurement to fair value less costs to sell of the assets of
the discontinued operation.
Problem 2: Lucky Utility has four outlets: Lucky View, Lucky Osho, Lucky Blue, Lucky Plus. A business
restructuring was carried out for the year 31/3/2016:
Lucky Plus is to be discontinued. The assets and liabilities are not disposed off separately. It will be sold
in a single transaction. The profit after tax shows a figure of ₹ 5,00,000, Sum of the assets: `14,00,000 and
liabilities ₹ 3,00,000. Recoverable value ₹ 20,00,000.
Part of Lucky Osho i.e. a building along with its furniture will be sold. The loan liability will also be passed in
the same transaction. The division will be continued. Assets impaired at ₹ 25,000.
Show the above reconstruction plan.
Solution:
Lucky Plus satisfies a DO. This means that the company needs to disclose a single amount on the face of the
income statement comprising the total of:
◘◘ The post-tax profit or loss of the discontinued operation ₹ 5,00,000 and

The assets and liabilities of the DO satisfies also the definition of disposal group held for sale. – The post-tax
gain or loss recognized on the measurement to fair value less costs to sell of the assets of the discontinued
operation → Nil…….no impairment.
Balance Sheet: (assets and liabilities to be separately disclosed)
Current Asset:
NCA – HFS: Sundry Assets = ₹ 1400000
Current liabilities:
NCL – HFS: Sundry liabilities = ₹ 300000
Lucky Osho satisfies the definition of disposal group held for sale. Assets and liabilities are to be separately
disclosed as above in case of DO.
However impairment loss is to be disclosed separately under the head continuing operations.
Problem 3: Omega follows the cost model when measuring its property, plant and equipment. One of its
properties was carried in the statement of financial position at 31 March 2017 at $6 million. The depreciable
amount of this property was estimated at $3.6 million at 31 March 2017 and the estimated future economic
life of the property at 31 March 2017 was 18 years. Omega depreciates its properties on a monthly basis.
On 1 January 2018 Omega decided to dispose of the property as it was surplus to requirements and began
to actively seek a buyer. On 1 January 2018 Omega estimated that the market value of the property was $ 7.1
million and that the costs of selling the property would be $80,000. These estimates remained appropriate
at 31 March 2018.
The property was sold on 1 June 2018 for net proceeds of $7million.
Required:
Explain, with relevant calculations, how the property would be treated in the financial statements of Omega
for the year ended 31 March 2018 and the year ending 31 March 2019.
Solution: Year ended 31March 2018
On 1 January 2018 the property would be designated as ‘held for sale’. The implications of this treatment are
that the property would cease to be depreciated and be classified in a separate section of the statement of
financial position-non-current assets held for sale.
The depreciation on the property to the date of classification as held for sale would be 150 (3,600 x 1/18x9/12)
and this would be charged as an operating expense in the statement of comprehensive income.
The carrying value of the properly immediately before reclassification of 5,850(6,000-150) would be
compared with its ‘fair value less costs to sell’ of 7,020(7,100-80). The new carrying value of the property is
the lower of these two amounts- in this case 5,850.
Year ended 31 March 2019
No depreciation will be charged on the property.
At the date of sale, profit on sale of 1,150 (7,000-5,850) will be reported in the statement of comprehensive
income.
CHAPTER 22
IND AS 108: OPERATING
SEGMENTS
Chapter Outline
vv Differences between IFRS - 8 and Ind AS – 108
AS-17 Ind AS – 108

AS-17 titled as Segment Reporting Ind AS-108 titled as Operating Segment
AS-17 requires classification between Business segment Ind AS-108 requires identification of “operating segments”
and Geographical Segment. Further the classification is based on internal management reports that are regularly
into Primary and Secondary Segments. reviewed by the entity’s “chief operating decision maker”
for the purposes of allocating resources to the segments
and assessing their performance.
Segments which are not material or non – reportable (by Segments which are not material or non – reportable are
10%....criteria) are shown in unallocable column. reported separately. If it is not separately reported then it is
shown as an unallocated reconciling item.
Segment’s definition does not mention intersegment According to Ind AS-108, a segment is component of an
transferor segment as one of the segment. Yes but our entity that sells primarily or exclusively to other operating
segment revenue definition includes revenue from other segments of the entity is included in the definition of an
segments. “operating segment provided the entity is managed in that
manner.
Not covered à (c) IFRS 8 extends the scope of segment reporting to
include (1) entities that hold assets in a fiduciary capacity
for a broad group of outsiders and (2) entities whose equity
or debt securities are publicly traded and entities that are
in the process of issuing equity or debt securities in public
securities markets.
Same accounting policies adopted for the entity’s financial May or may not be consistent with the accounting policies
statements are used in segment reporting too. adopted for the entity’s financial statements.
Liabilities should be part of segment reporting Measurement of liabilities may be disclosed in segment
information only if it is regularly reported to Chief Operating
Decision Maker (CODM).
AS 17 is silent on this aspectà Previous period segment reporting to be re-stated unless

information is not available
AS 17 is silent on this aspectà Start - up operations may be operating segments before
earning revenues.
No Aggregation criterion is applicable. The criteria for BS / Two or more operating segments may be aggregated if:
GS are based on risk and reward profile. Aggregation is consistent with the core principle of Ind AS - 8
These operating segments have same economic
characteristics; and
They are similar in MAJORITY of the following aspects:-
a. nature of products and services;
b. nature of production process;
c. type or class of customers;
d. methods used for distribution of products or providing
services;
e. Nature of regulatory environment, IF applicable eg.
Banking, insurance or public utilities.
Interest revenue and interest expenses should not form Interest revenue and interest expenses to be separately
part of the definition of segment revenue and segment reported for the reportable segment. No specific mention
expense is a specific mention. about their exclusion.
Segment Reporting is just a formal Statement of Segment Ind AS - 108 requires reconciliations of total reportable
Assets, Liabilities, Revenue and Expenses. Reconciliation is segment revenues, total profit or loss, total assets, and
not mentioned. other amounts disclosed for reportable segments to
corresponding amounts in the entity’s financial statements.
Differences between IFRS - 8 and Ind AS – 108

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

Definition of Operating Segment:
According to Ind AS-108 an “operating segment” is a component of an entity :
◘◘ That engages in business activities from which it may earn revenues and incur expenses (including
revenues and expenses relating to transactions with other components of the same entity)
◘◘ Whose operating results are reviewed regularly by the entity’s Chief Operating Decision
Maker (CODM) to make decisions about resources to be allocated to the segment and assess its perfor-
mance; and
◘◘ For which discrete financial information is available.
Following important points emerges from the above definition:
No concept of BS / GS. No concept of primary and secondary segment. It is the CODM who will decide the
Segments. From the first part of the definition it is even clear that even a transferor segment is a Segment. It is
IND AS 108: OPERATING SEGMENTS 97
a Manager dominated classification rather than based on risk and return analysis. YA its correct Management
knows how to allot resurces and how that segments are performing.
Aggregation criteria
According to Ind AS-108 an “operating segment” is a component of an entity:
Two or more operating segments may be aggregated if these operating segments have same economic
characteristics; and they are similar in majority the following aspects:-
(a) nature of products and services; ex: chairs, tables are similar product can be merged ;
(b) nature of production process; ex: chairs, tables can be merged ;
(c) type or class of customers;
(d) methods used for distribution of products or providing services; ex: Reader Publications sells books
for academic and professional through retail outlet only.
(e) Nature of regulatory environment: ex: Life insurance and property can be merged.
PROBLEM & SOLUTION
Problem 1: Rekfor Fontry Ltd has 2 products making servers and making other software. Most of the risk
and reward factors are common. But the CODM wants to classify them as segment. Comment as per AS-17
and Ind AS-108.
Solution: AS-17: Business or Geographical Segments are decided by risk and reward profile / features.
Accordingly servers and other software are Segments.
Ind AS-108: Ind AS-108 requires identification of “operating segments” based on internal management
reports that are regularly reviewed by the entity’s “chief operating decision maker” for the purposes of
allocating resources to the segments and assessing their performance. If as per the CODM the 2 products
are 2 segments then yes the entity should follow Segment reporting. Also one should check the 10% criteria.
FINANCIAL INSTRUMENTS
CHAPTER 23
IND AS – 109 / IFRS – 9: Recognition
IND AS – 107 / IFRS – 7: Presentation
IND AS – 32 / IAS – 32: Disclosures
Chapter Outline
vv Contracts which will be settled in vv Problems on Business Model
entities own equity instruments vv Problems on SPPI test Model
vv Comprehensive illustrations on vv Ind AS-109 prescribes two models for computing
financial instruments loss allowance on financial assets
vv Equity instruments vv Accounting treatment as per Ind AS - 109
vv Expenses incurred on Equity: Ind AS-109 vv Hedge accounting
vv Are all Derivatives Financial Instruments vv Problems and Solutions
vv Practical issues in Classification vv Problems on hedging
of FA: Question / Answer
Financial Instrument is a contract that gives rise to a FA to one entity, and a FL or equity instrument to
another entity. Financial instrument includes primary financial instrument like receivables, payables, loans
and debentures. It also includes derivative instruments like futures, options, FRA, swaps. A derivative with a
positive value is FA and negative value is FL. Even a contract to buy or sell a non – financial item may in certain
cases give rise to a FA or a FL.
Abbreviations: FL (Financial liabilities), FA (Financial Assets), FI (Financial Instruments)
1. Objective of the Standard:
The standard gives the principle of measurement and recording of financial assets and financial
liabilities. It also provides presentation and disclosure principles.
2. Financial instruments: (Ind AS-109)
ww It is a legal document entered between two parties.
ww It is a legal enforcement to receive financial assets and repay financial liabilities (It is always
under a contract).
ww One party has the right to receive payment of money / liquid asset and another party has the
right to pay the money / liquid asset. For one party financial instrument is financial asset and for
other it is financial liability or equity.
Primary FI: receivables, payables, loans and advances, derivative instruments like options, futures,
swap etc.
3. Contract to buy / sell non – financial instruments:
Contract to buy / sell non - financial items are not FI. Ex: Contact to buy fixed asset, goods.
But if goods are sold and money is payable then the liability to pay becomes financial instrument.
Examples of FA / FL
Financial assets within the scope of Ind AS 109 includes:
◘◘ Cash
◘◘ Deposits in other entities
◘◘ Receivables (e.g., trade receivables)
◘◘ Loans to other entities
◘◘ Investments in bonds and other debt instruments issued by other entities
◘◘ Investments in shares and other equity instruments issued by other entities
Financial liabilities within the scope of Ind AS 109 include
◘◘ Deposit liabilities
◘◘ Payables (e.g., trade payables)
◘◘ Loans from other entities
◘◘ Bonds and other debt instruments issued by the entity.
4. Scope (exception):
Ind AS- 109 applies in the accounting for all financial instruments except for those financial
instruments specifically exempted.
Employee benefit plans Employee Benefits (Ind AS19)
Interests in subsidiaries CFS (Ind AS 27)
Interests in associates Investments in Associates (Ind AS 27) )
Interests in joint ventures Interests in Joint Ventures (Ind AS 27)
Share-based payment transactions, (Ind AS 102)
Insurance contracts Insurance Contracts (Ind AS 104)
5. Financial assets: AS-30 It is any asset that is:
ww Cash;
ww Equity instrument of another entity – Ex Investments in equity shares of another company.
ww A contractual right - to receive cash / financial assets (Example: Drs.).
OR
ww To exchange financial assets / financial liabilities with another entity under conditions that is
potentially favorable to the entity.
ww Contracts that will or may be settled in entities own equity instruments that is:
(i) a non – derivative instrument where the entity is obliged to receive variable number of the entity’s
own equity instruments.
OR
(ii) a derivative instrument that will or may be settled other than by the exchange of a fixed amount of
cash / FA for a fixed number of entity’s own equity instruments.
Analysis of the definition financial assets:
1. Cash: It is the medium of exchange. It is a specific mention in AS-30 as a FA.
2. A contractual right: To receive cash / financial assets. Example: Trade receivables, Loans given,
investments in bonds / debn.
OR
To exchange financial assets / financial liabilities with another entity for terms which are
potentially favourable.
Financial instruments Ind As – 109 / IFRS– 9: recognition Ind As – 107 / RRS – 7: Presentation Ind As – 32 / IAS– 32: Disclosures 100
Example: Berlin Crafts entered into a 5 February Futures contract to buy 125MT (lot size 25) of steel
parts at an agreed price of ` 6500 per MT. Also there is practice of settling transactions on net basis for
commodity futures. This is now 31st March where Berlin Crafts finalizes accounts. As on that date actual
price for steel is `6555 as per MT. The Futures traded at ` 6,600 for the remaining maturity.
Solution: On 31st March Berlin Crafts will show the future contract (derivative) as:
Financial asset Dr 12,500 (6,600 – 6,500) x 125…..potentially favorite.
To Profit / Loss A/C 12,500
Contracts which will be settled in entities own equity instruments

Non – derivative instruments where the entity is obliged to receive variable number of the entity’s own equity
instruments.
Example: Mistry Ltd entered into a contract to issue 10% Debentures Rs 6,00,000 to Jamshed Ltd.
against receipt of entities own equity shares at the price prevailing after 3 months. Suppose the price
of the share after 3 months is ` 1200. Then Mistry Ltd. has to receive 500 own equity shares. The shares
received are variable and not fixed. Also it is not a derivative contract.
OR
a derivative instrument that will be settled other than by exchange of a fixed amount of cash / FA against fixed
number of entity’s own equity instrument.
Example: R. Com Ltd. entered into a contract to receive 5,000 (fixed) number of own equity instruments
for an amount of cash computed (variable) equivalent to 10 litres of oil. As the number of shares will
depend upon value of oil at the Commodity Exchange. Instead of cash the contract will be settled by
entity’s own shares.
Important Note:
If a company entered into a contract to receive 5,000 (fixed) number of own equity shares for fixed cash say
` 2,00,000 then it is an equity instrument (also known as fixed for fixed contracts).
DO YOU KNOW
Equity is a head and not an a/c. It means if we say equity instrument it should go to the head EQUITY and if it
is FL then it should go to Non – Current / Current liability.
6. Financial liability: (Ind AS-109)

Any liability that is:
ww A contractual obligation to deliver cash or another financial asset to another entity; (already
covered in FA).
ww or to exchange financial assets or financial liabilities with another entity under conditions that
are potentially unfavourable to the entity; (already covered in FA)
ww or A contract that will or may be settled (delivery to be made) in the entity’s own equity instru-
ments and is a non derivative instrument. Also the entity is oblige to issue variable number of
equity instruments of the entity. (already covered in FA)
ww or a derivative instrument that will be settled other than by exchange of a fixed amount of cash /
FA against fixed number of entity’s own equity instrument (already covered in FA).
Examples of liabilities that meet the definition of financial liabilities are
ww Payables (e.g., trade payables), Loans from other entities, Issued bonds and other debt instru-
ments issued by the entity, Derivative financial liabilities, Obligations to deliver own shares
worth a fixed amount of cash.
COMPREHENSIVE ILLUSTRATIONS ON FINANCIAL INSTRUMENTS

Financial
Particulars Reasons
Instrument
Trade receivable Y Right to receive cash / fixed monetary value
Trade creditors Y Right to pay cash / fixed monetary value
Contract for right to sell goods / Fixed N Delivery of non financial instrument
asset
Advance paid to supplier of goods N Promise to supply goods
Advance received from customers N Promise to receive goods
Prepaid exp /rent etc. N Promise to render service / house accommodation
Gold bullion N Gold is like cash / liquid. But there is no contractual right to
receive cash. So it is considered as a commodity and not FI
Cash Y Amount will be recd – It is the basis on which all FI are based.
Bank borrowings Y Obligation to pay cash
Derivative Y Contractual right / obligation to receive / pay cash (except
some contracts which are settled by physical delivery)
Intangible Assets N Non monetary.
Operating lease contract N Non cash benefit.
Lease income / rent O/S under Y Lease payable / receivable are FI as cash will be recd / paid in
Operating lease contract. future which is fixed under a contract.
Finance lease contract Y At the inception of signing lease contract the lessor records
the PV of lease receivables (in future cash will be received). So
also for lessee.
Advance tax / VAT / TDS / Excise duty N Statutory liability and not under a contract
etc
Forward contract N Delivery based not a FI
Bank deposit Y Right to receive cash
Gold Bonds Y Right to receive cash (investments)
Commodity contracts N As they are held for sale / usage requirement
Commodity contracts: Y It’s a derivative contract as well as FI as it is entered for earning
net settled in cash / financial profit and not for further sale / usage.
instrument.
or
practice of making short term profit
or
readily converted into cash
Issued equity capital Y It is an equity instrument.
7. (A) Equity:
Equity is a residual interest in the assets of an entity after deducting the liabilities. Ind AS 32 is based
on the presentation principle of financial instruments between liability and equity.
Equity instruments
Following is the list of some of the equity instruments: Such instruments are presented under the head Equity:
(1) Non – Puttable Shares.
(2) Any instrument whereby the entity does not have any liability to deliver cash, any FA or entities own
variable number of equity shares. Entity has an unconditional right to reject the payment. There
is no such obligation to exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavourable to the entity.
(3) Any instrument whereby the entity is obliged to deliver its own fixed equity shares at a fixed exercise
price.
(4) Instruments imposing obligation to deliver pro – rata share in Net Assets only on liquidation.
(5) Preference Shares (when the distribution is at the discretion of the issuer).
(6) The instrument should be subordinate to all other classes of instrument.
(7) The total cash flows payable to the instrument is based on profit/loss or change in the recognized net
assets of the entity.
To understand the above points lets analyze in detail each instrument:

Non – Puttable Shares: Lets understand puttable shares first. Puttable instruments are those instruments
which can be put back (sell back) to the writer by the holder. Hence puttable is FL and non - puttable Equity.
Instrument does not carry a liability: Recall we have defined FL as an instrument which is settled in cash
/ FA / variable equity shares. Equity instrument does not carry any liability.
Settlement of instrument in enity’s fixed shares for a fixed price.
Example: Share Warrants, Written Call options on own shares, ESOP O/S.
Do you know: All the above instruments can either lapse or exercised at a fix exercise price.
Illustration: Why written call option on equity shares is an equity instrument?
Uber Ltd sold options on own shares to Ola Ltd. Details given below:
Trade date: 1/1/2017
Settlement : 30/4/2017
Exercise price: ` 200
Spot price: ` 195
Price on 31/3/2017: ` 212
Price on 30/4/2017: `230 or ` 197
Option premium: ` 25
Settlement type: Gross delivery
Units: ` 50,000
Face value: `10
1/1/2017: Initial recognition:
Cash a/c Dr (50000 x 25) 12,50,000
To Option premium 12,50,000
Option premium a/c Dr 12,50,000
To Equity a/c 12,50,000
31/3/2017: No revaluation………….Equity instruments are never revalued.
30/4/2017: Settlement:
Cash a/c Dr (50,000 x 200)1,00,00,000
Equity a/c 12,50,000…option premium already recd becomes consideration
To Equity Share Capital a/c (50,000 x 10) 5,00,000

To Securities Premium a/c 1,07,50,000
If the Market price on settlement would have been Rs. 197 then it was a case of out of the money to the holder
and such option would lapse. Hence the premium in that case should be transferred to General Reserve.
Instruments imposing obligation to pay on pro – rata basis:
A Minority Interest (NCI) forces the entity to pay on liquidation his share in net assets.
Preference Shares: Most of the PS have repayment clause hence they are FL. But if the redemption is purely
at the discretion of the entity then it is equity (plz refer comprehensive problems on classification of PS
between equity and FL).
Subordinate instrument: Such instrument does not carry priority for payment. This means they will be
paid either dividend or net assets after all holders are paid hence subordinate.
Cash flows paid to such instrument is based on P/L or recorded net assets:
Consider interest on debenture even if there is no profit during the year you have to pay interest. But equity
shares are paid only when the entity earns profits.
DO YOU KNOW
When we say classification between equity and FL it is from the ISSUERS point of view and not the Investor.
DO YOU KNOW
DEBENTURES EQUITY PREFERENCE CONV DEBN

For an Investor FA FA FA FA
For an Issuer FL Equity FL / Equity PV of Cash flows is FL
and residual component
Equity
Expenses incurred on Equity: Ind AS-109

The financial / transaction costs relating to the issue of financial instruments like printing expenses, regulatory
fees, stamp duties, registration fees etc are to be properly accounted.
Expenses related to equity are to be deducted from equity.
Expenses which could have been abandoned or avoided are to be expensed.
8. Derivatives: (Ind AS-109)……….(CA Final Nov 2014)
For an instrument to be eligible for derivative all the conditions should be satisfied:
ww Value of contract is based on current value of underlying asset. Ex: Interest rate in case of IRS,
forward contract may be based upon the forex rate etc.
ww It requires low or no initial investments. In case of Swaps / forward Zero investments are required,
in case of options premium is required. The initial investments are smaller as compared to other
contract to have similar response to change in market factor.
ww Settlement takes place at a future date.
Example:
Derivative financial instruments within the scope of Ind AS-109 include:
◘◘ A purchased call option to purchase an asset at a fixed price on a future date.
◘◘ A forward contract for the purchase (or sale) of an asset at a future date whereby the price is fixed today.
DO YOU KNOW
Margins are not initial investments; they are collateral security for provision of losses. They are to be accounted
separately as Current Assets.
Illustrations 1: 6 months future contract of gold entered at ` 12000, it is currently trading at ` 10000 by
paying 20% margin.
Analysis:
Value of contract is based on current value of underlying asset = The future contract price 12000 is based on
current price 10000.
low initial investments = 20% of spot position
Future settlement. = after 6 months (net settlement)
Illustrations 2: Bull Limited has following options for acquiring 1000 shares of Bear Limited:
Current market price ` 20, ii) forward contract at a price of ` 25 delivery to be made after
3 months. 80% of the forward price is to be paid up front.
Analysis:
No it is not derivative contract. The underlying variable = market price of the share The initial investments is
not smaller as compared to other contract to have similar response to change in market factor. Investments is
80% of ` 25 i.e. ` 20 whereas Bull can purchase share from the market at `20 (cash price).
Underlying variable of derivatives contract:

List of contracts Underlying variable
Interest rate swap Interest rate
Credit swap Credit rating
Stock index futures / options Benchmark index like Sensex / Nifty
Stock futures / options Particular equity share
Currency swap/future/forward/options Forex rate
Interest rate futures / options Interest rate
DO YOU KNOW
Derivative contracts end up in three ways: (i) Net settlement in cash, (ii) Net settlement in shares / goods, (iii)
Actual Delivery based.
Are all Derivatives Financial Instruments

If Derivatives contract are net settled then it is FI. Remember net settlement can be in cash / any FA / or
entity’s own variable number of shares.
If Derivatives are settled by physical delivery of commodities: No it is not FI. But if the physical goods received
by the recipient is further sold in a ready forward market then it is FI for the recipient. In substance the
recipient is making net profit out of the transactions.
9. Financial Guarantee:
A Financial guarantee is a contract that requires the issuer to make specified payments to reimburse the
holder for the loss arising out of the default made by the debtor relating to a debt instrument.
10. Loan commitment:

Loan commitment is actually a Contingent liability as per Ind AS-37.
But Loan commitment can be covered under Ind AS-109 in any of the conditions mentioned below:
(i) If Loan commitment is held for trading (earning short term profit).
(ii) Loan commitment in the nature of derivatives.
11. CLASSIFICATION OF FINANCIAL ASSETS:
Under Ind AS – 109, all financial assets are classified into the following 3 categories:
( a ) Amortised Cost
( b ) Fair value through profit or loss (FVTPL)
( c ) Fair value through other comprehensive income (FVTOCI)
The classification itself depends on the following 2 criteria:
(a) The entity’s business model for managing the financial assets, and
(b) The contractual cash flow characteristics of the financial asset.
11 (a) Business models:
Business models refer to how an entity manages its financial assets so as to generate / realize cash
flows. Business Models (BM) is determined on the basis of scenarios which are reasonably expected
to be achieved. Following are the BM’s:
(i) Hold to collect contractual cash flows: Here the entity manages the portfolio to collect cash flows
on the maturity consisting of interest and principal. Example: Collection of final face value
(maturity proceeds) of a ZCB on its maturity.
(ii) Hold to sell the asset: Here the entity is actively engaged in buying and selling of the instrument.
The entity makes decisions to collect the fair value of the FA. For ex: X Ltd is engaged in the
trading of financial stocks by buying at a lower price and selling at higher rate. Interest and
dividend collection is just incidental. Here the BM is to collect cash flows by fair value gains.
(iii) Hold to collect contractual cash flows and even selling FA: In this type of BM, the entity’s key
management personnel have made a decision that both collecting contractual cash flows as well
selling financial assets are integral to achieve the objective of the BM.
Example: An entity anticipates capital expenditure within few years. The entity invests surplus cash in short
and long term FA for funding capex. The entity will hold the FA to collect contractual cash flows as well as by
selling the investments.
11 (b) Contractual Cash Flows Characteristics (CCFC) or SPPI test:
After assessing the Business Model, the entity should assess whether the asset’s contractual cash flows
represent solely payments of principal and interest on the principal amount o/s. CCFC is within the BM test.
Ind AS 109 requires an entity to classify a FA on the basis of its contractual cash flow characteristics also.
Contractual cash flows that are solely payments of principle and interest on the principal amount o/s are
consistent with a ‘basic lending arrangement’. In a basic lending arrangement consideration for the time
value of money and credit risk are typically the most significant elements of interest.
An entity shall assess whether contractual cash flows are solely payments of principal and interest on the
principal amount outstanding. This is also known as SPPI test.
What is Principal and interest solely on o/s principal?
◘◘ Principal is the fair value of the financial asset at initial recognition (however that principal amount
may change over the life of the financial asset, if there are repayment of principal.
◘◘ Interest consists of consideration for: time value, credit risk, profit margin, other lending risks.
SPPI test give the holder a return which is in line with a ‘basic lending arrangement’. SPPI test is required to
decide whether an instrument structured as ‘debt instrument’ actually has the ‘basic loan features’.
Illustration:
Magnetam Ltd has issued bond with a stated maturity date. Payments of principal and interest are related to
inflation index.
Analysis: Payments of principal and interest are related to inflation index. This means it compensates for the
time value. Yes in the above case the contractual cash flows are solely payments of principal and interest on
the principal amount outstanding.
If the interest is based on the principal which is linked to any commodity price then contractual cash flows
are not solely payments of principal and interest on the principal amount outstanding.
Following are some ex whereby the instruments are not leveraged financial asset hence SPPI test is positive:
Inflation index bond
Floating rate bond
Caps and Collars
Following are some ex whereby the instruments are leveraged financial asset:
Convertible bond
Principal is based on equity index
Loan will be repaid based on the realisable value of equity shares.
Practical issues in Classification of FA: Question / Answer

Question 1: When debt instrument can be classified under amortized cost?
Answer: Both the conditions should be satisfied: a) The entity manages the portfolio to collect cash flows
on the maturity of interest and principal (BM test). b) Cash flows should be based on principal amount o/s
(SPPI test).
Question 2: When debt instrument can be classified under FVTOCI?
Answer: Both the conditions should be satisfied: a) The entity manages the portfolio to collect cash flows on
the maturity as well as the portfolio can be sold for fair value gains (BM test). b) Cash flows should be based
on principal amount o/s (SPPI test).
Question 3: Which debt instrument can be classified under the FVTPL category:
Any one condition should be satisfied:
(1) If debt is held for trading (stock in trade)
(2) It is a residual head
If Debt is not held for the Business Model CCFC then it is always classified as FVTPL.
Question 4: Which equity instrument can be classified under the FVTPL / FVTOCI / Amortised Cost?
First of all Equity instrument cannot be classified at Amortised Cost. This is because equity instrument cannot
satisfy SPPI or collection of contractual cash flows condition.
Any one condition is to be satisfied:
If equity is held for trading then it is classified as FVTPL.
IF FVTOCI option is not selected → FVTPL. This means FVTPL is a residual category.
DO YOU KNOW
Equity instruments (FA) are the ones that meet the definition of ‘equity’ from the perspective of issuer under
Ind AS – 32.
Question 5: Which Derivative instrument can be classified under the FVTPL / FVTOCI / Amortised Cost?
Derivative can only be FVTPL (held for trading). No other classification possible.
DO YOU KNOW
Derivative instrument net settlement (P/L) = FVTPL
Derivative instrument Gross settlement = Not a financial instrument (except for commodity broker)
Derivative instrument net settlement (P/L) for hedging = separately discussed in Ind AS – 109.
Derivative instrument for delivery of own fix equity shares at a fix exercise price: Equity
Summary of Classification
Financial Instrument Possible Classification
Debt instrument AC / FVTOCI / FVTPL
Equity instrument FVTOCI / FVTPL
Derivative instrument FVTPL
Problems on Business Model

Problem 1: An entity determines that the objective for its portfolio of financial assets is to hold till maturity
for collecting contractual cash flows. However, there are few past sales related to the portfolio. Entity sells FA
due to increase in the asset’s credit risk.
Problem 2: An entity determines that the objective for its portfolio of financial assets is to hold till maturity
for collecting contractual cash flows. However, there are few past sales related to the portfolio. Entity sells
FA close to the maturity whereby the sales approximate the collection of remaining contractual cash flows.
Problem 3: A non – financial entity anticipates capital expenditure in a few years. The entity invests the
funds in short term assets to collect contractual cash flows. But if an opportunity arises it will sell the FA for
a higher return.
Problem 4: A non – financial entity anticipates capital expenditure in a few years. The entity invests the
funds in short term assets to collect contractual cash flows. The maturity proceeds is again reinvested in
another short term funds. This strategy is maintained until the funds are needed for capital expenditure.
Solution1: The fact that an entity sells FA due to increase in the assets credit risk does not vitiate the entity’s
BM of holding the assets to collect contractual cash flows.
Solution 2: Total proceeds from selling as well as holding the assets to collect contractual cash flows are
same. BM is to hold the assets to collect contractual cash flows.
Solution 3: BM is both collecting contractual cash flows as well as to sell the FA.
Solution 4: Sale of FA takes place only in case of maturity which is natural. Fair value gains are not relevant.
BM is to collect contractual cash flows.
Problems on SPPI test Model

SPPI test → solely payments of principal and interest
Problem 1: An entity had issued INR 12,00,000 of acquired debt and INR 15,00,000 of originated debt.
Problem 2: Challa Ltd has a general creditor Billu Ltd and a Bank loan (secured). In case of bankruptcy the
loan will have priority over general creditor. Is the trade receivable in the books of Billu satisfies SPPI test.
Problem 3: Instrument X is a variable interest rate instrument with a stated maturity date. It permits the
borrower to choose the market interest rate on an ongoing basis. LIBOR is reset every 3 months.
Problem 4: Kolu Ltd had issued fixed as well as variable interest rate instruments.
Problem 5: Entity Gul invests in units of MF in an open ended money market / debt fund.
Problem 6: Balu Ltd holds a bond which pays LIBOR+1%. The contractual provisions of the instrument
establish that if the issuer credit rating changes, the interest rate of the entire instrument will be reset to lets
say LIBOR+2%.
Problem 7: A financial asset M requires an increase (a ‘step up’) in the interest rate at certain stages of the
life of the asset.
Problem 8: Neru Ltd has invested in Convertible Bonds of Texas Inc.
Problem 9: Japalu Bros has invested in a bond which pays interest in an inverse relationship with market
interest rates.
Solution 1: For an investor it does not matter whether it is an acquired or originated debt. We assume that
both principal and interest is paid as per the normal borrowing norms.
Solution 2: The loan will have a priority over general creditor. However, it does not affect the contractual
right of normal creditor to unpaid principal and other amounts due. The trade receivable in the books of Billu
meets SPPI test.
Solution 3: The CCF are SPPI as long as the interest paid over the life of the instrument reflects consideration
for the TVM, for the credit risk associated with the instrument, profit margin. The fact that the LIBOR interest
rate is reset during the life of the instrument does not in itself disqualify the investment.
Solution 4: The CCF are SPPI as long as the interest paid over the life of the instrument reflects consideration
for the TVM, for the credit risk associated with the instrument, profit margin. Both the fixed as well as variable
interest instruments qualify for the features of basic lending norms.
Solution 5: Here the MF scheme is an open ended scheme (any time entry or exit is very common). Further
the investor in a MF enters and exit at NAV (fair value) related prices. This means the return received by the
investors does not represent payments of principal and interest.
Solution 6: A compensation for credit risk by changing the interest rate is one of the feature of basic lending
arrangement. Hence satisfies SPPI test.
Solution 7: The instrument will pass the SPPI test if both the following conditions are met: (i) Step up rates
are decided at the inception. (ii) NPV at the beginning is same as if the instrument is a fixed interest security.
However, if the step – up rates compensate the lender for more than what would be considered appropriate
in a basic lending arrangement, the instrument is likely to fail the SPPI test.
Solution 8: The holder would analyse the Conv bond in its entirety, since Ind AS-109 does not separate
embedded derivatives from FA. The CCF are not SPPI because they reflect a return that is inconsistent with a
basic lending arrangement.
Solution9: The CCF are not SPPI. The interest amounts are not consideration for the time value of money.
12. CLASSIFICATION OF FINANCIAL LIABILITY:
Under Ind AS – 109, all financial liabilities are classified into the following 2 categories:
(a) Amortised Cost
(b) Fair value through profit or loss (FVTPL)……held for trading FL.
Examples of FL held for trading:
(1) Shorting in cash market for equity shares. The obligation to pay FA for shares borrowed is FL for
trading. 2) Buy back of own bonds already issued at a market price. 3) Derivative for net settlement
and proved to be potentially unfavorable.
(13) Initial Recognition of FA / FL:
Receivables / Payables : When the Entity becomes a party to the Contract and has a legal right to receive
or a legal obligation to pay cash.
Firm Commitment to Buy / Sell Goods / Service: When one of parties has performed, e.g. Entity that places
order recognizes the Liability only when the Goods are shipped / delivered.
Forward Contract: Commitment Date, Not on the Settlement Date.
Option Contracts: When the Holder / Writer becomes a Party to the Contract.
Planned Future Transactions: Not to record assets / liabilities, since Entity has not become a party to it.
(14) Measurement: Entity shall measure a Financial Asset / Liability (except FVTPL) at its Fair Value
plus / minus Transaction Costs. Transaction costs may arise in the acquisition, issuance, or disposal
of a financial instrument. Transaction costs are incremental costs, such as fees and commissions paid
to agents, advisers, brokers and dealers; levies by regulatory agencies and securities exchanges; and
transfer taxes and duties.
For FA:
For FVTPL = Fair Value excluding Transaction Costs.
For FVTOCI and Amortized Cost = Fair Value plus Transaction Costs.
For FL:
For FVTPL = Fair Value excluding Transaction Costs.
For Amortized Cost = Fair Value less Transaction Costs.
Pirate Ltd has acquired 12000 equity shares of Appollo Munich at ₹ 120. Brokerage and taxes 2.5%.
Assuming FVTPL, FVTOCI.
IF FVTPL
FVTPL Dr (12000 x 120) 14,40,000
Transaction Fee Dr 36,000
To Cash 14,76,000
IF FVTOCI
FVTOCI Dr 1,44,76,000
To Cash 14,76,000
Trade date and settlement date same from book……………..
(15) Subsequent Measurement:
(1) FVPTL: At Fair Value. The difference is transferred to P/L.
(2) FVTOCI: At Fair Value. The difference is transferred to OCI (OCI is further transferred to equity).
(3) Amorised Cost: It will be amortised till the maturity. Amortised Cost = (Opening balance +
Accrued Yield (interest) – Cash paid / received)
(16) Recognition of Interest, Dividend and other items:
Debt instruments + FVPTL
Interest / Derecognition → P/L
Debt instruments + FVTOCI
Interest → P/L
Derecognition → Recycled from OCI to P/L.
Debt instruments + Amortised Cost
Interest / Impairment / Derecognition → P/L.
Equity instruments + FVPTL

Dividend / Derecognition àP/L
Equity instruments + FVTOCI
Dividend → P/L
Derecognition → OCI (Recycling not allowed)
(17) (a) SUMMARY OF FINANCIAL ASSETS:
FVTPL FVTOCI FVTOCI

Particulars Amort Cost
(Debt / Equity) (Debt) (Equity)
Initial recognition FV excluding exp FV including exp FV including exp FV including exp
Exp chg to P/L
Valuation FV FV FV Amort Cost
Valuation difference P/L OCI OCI N.A.
Interest / Dividend income P/L P/L P/L Included in
amortization
Impairment losses NA P/L OCI P/L
Fx gain / loss P/L P/L OCI P/L
Derecognition gain / loss P/L From OCI (no recycling P/L
OCI it is transferred to P/L is allowed)
to P/L
(b) SUMMARY OF FINANCIAL LIABILITIES:
Particulars FVTPL Amort cost

Initial recognition FV excluding exp FV less exp
Exp chg to P/L
Interest NA Covered under amortization table
Valuation FV Amort cost
Valuation difference P/L NA
Fx gain / loss NA P/L
Gain or loss due to change in own OCI* NA
credit risk
* If held for trading → P/L

18. When to record FA / FL Or Also known as regular way of purchase / sale:
As per Ind AS-109 an entity should record a FA / FL only when they become parties to the contract.
Becoming parties to a contract means committing to purchase a security or committed to write a
derivative option. Only promises / intent to do something is not important.
Timing of recording FA / FL also depends upon the trade date and settlement date.
Recording as per trade date and settlement date is similar to regular purchase or sale transaction.
ww In case of trade date recording is done on the date when trade takes place.
ww In case of settlement method the transaction is recorded when financial instrument is received
or delivered by an entity.
Illustration: Restless Ltd purchased a Financial asset as on 29/3/2017 for ` 100. The fair value of the asset
as on 31/3/2017 (year end) ` 105 and on 02/4/2017 (settlement date) ` 106.
Assuming the purchase of FA is recorded as per trade date.
FVTPL FVTOCI A Cost
29/3/2017
FA (Financial Asset) Dr 100 100 100
To Payables 100 100 100
31/3/2017
FA Dr 5 - -
To P / L 5
FA Dr - 5 -
To OCI 5
2/4/2017
FA Dr 1 - -
To P / L 1
FA Dr - 1 -
To OCI 1
Payables Dr 100 100 100
To Cash / Bk 100 100 100
Assuming the purchase of FA is recorded as per settlement date.

FVTPL FVTOCI A Cost
29/3/2017
- - - -
31/3/2017
FA Dr 5 - -
To P / L 5
FA Dr 5 -
To OCI 5
2/4/2017
FA Dr 1 - -
To P / L 1
FA Dr 1 -
To OCI 1
FA Dr 100 100 100
To Cash / Bk 100 100 100
19. Impairment: (Ind AS-109)
Ind AS – 109 requires an entity to assess at each balance sheet date whether there is any objective
evidence that a financial asset or group of financial assets is impaired.
Objective evidence of impairment that a financial asset or group of financial assets is impaired
includes observable data about these loss events:
(a) Significant financial difficulty of the issuer or obligor
(b) A breach of contract, such as a default or delinquency in interest or principal payments
(c) A troubled debt restructuring
(d) It becomes probable that the borrower will enter bankruptcy or other financial reorganization
(e) The disappearance of an active market for that financial asset because of financial difficulties
An Entity shall recognize a Loss Allowance for expected Credit Losses on:
(a) Financial Asset that is measured at Amortised Cost : loans, debt securities, deposits, bank
balance etc.
(b) Financial Asset that are debt instruments and are measured at FVTOCI,
(c) Lease Receivable under Ind AS - 17,
(d) Contract Asset – ex: Trade receivable,
(e) Loan Commitment not measured at FVTPL,
(e) Financial Guarantee Contract not measured at FVTPL.
Illustration: As on 31st March 2016, the carrying amount of X Ltd.’s trade receivables is ` 100 lakhs of
which 20% of trade receivable is overdue. The debtors have re-negotiated with X Ltd to pay the dues after 1
year only 75% of the overdue amount. The incremental borrowing rate of the debtors is 12%. Found out the
expected credit loss.
Solution:
For the financial assets, a credit loss is the PV of the difference between:
◘◘ The contractual cash flows that are due on an entity under the contract; and
◘◘ The cash flows that the entity expects to receive
Expected credit loss = ` 20 lakh minus ` 15 lakhs / (1+12%) = ` 6.61 lakhs
Date Particulars Dr. Cr.

31st March 2016 Profit & Loss A/c Dr 6.61
To Loss Allowance A/c 6.61
(loss allowance increases because of delayed collection – it is
time value of money)
31st March 2016 Bank A/c Dr 95.00
Loss Allowance A/c Dr 6.61
To Trade Receivables A/c 100.00
To Unwinding of Discount A/c 1.61
(Collection on extended due date and recognition of winding
of discount)
31st March 2016 Unwinding of Discount A/c Dr 1.61
To Profit & Loss A/c 1.161
Measurement of expected credit losses – An entity shall measure expected credit losses of a financial instrument
in a way that reflects:
◘◘ An unbiased and probability – weighted amount that is determined by evaluating a range of possible
outcome
◘◘ The time value of money; and
◘◘ Reasonable and supportable information that is available without undue cost or effort at the reporting
date about past events, current conditions and forecasts of future economic conditions.
Ind AS-109 prescribes two models for computing loss allowance on financial
assets
(a) 12 month expected credit loss (12 months ECL): When credit risk on financial instrument has not
significantly increased since initial recognition;
(b) Life time expected credit loss (LTECL): When the credit risk on a financial instrument increased
significantly since initial recognition.
Therefore, it is critical to assess whether there is significant increase in credit risk of financial instrument
since inception.
Credit Risk on that Financial Instrument has increased significantly since Initial Recognition: At each reporting
date, an entity shall measure the loss allowance for a financial instrument at an amount equal to the lifetime
credit loss if the credit risk on that financial instrument has increased significantly since initial recognition.
There is a rebuttable presumption that the credit risk on a financial asset has increased significantly
since initial recognition when contractual payments are more than 30 days past due. Therefore, when an
entity determine loss allowance as on a reporting date of trade receivable or advances or other financial
assets having maturity of more than 30 days because of this rebuttable presumption is should adopt life time
expected loss model.
Credit Risk in a Financial Instrument has not Increased Significantly since initial Recognition: IF, at the reporting
date, the credit risk on a financial instrument has not increased significantly since initial recognition; an
entity shall measure the loss allowance for that financial instrument at an amount equal to 12 - months
expected credit losses.
Illustration:
[12-month Expected Credit Losses (ECL) measurement – Probability of default Approach] – An entity as a lender
– Single 10 years loan for ` 10 lakhs.
Solution:
At initial recognition, the POD over the next 12 months is 0.5%. at reporting date, no change in 12 months
POD; and entity assesses that no significant increase in credit risk since initial recognition – therefore Lifetime
ECL is not required to be recognized.
Loss given default (LGD) is determines to be 25% of gross carrying amount
Loan ` 10,00,000 A
LGD 25% B
POD – 12 months 0.5% C
Loss Allowance (for 12-months ECL) ` 1250 A*B*C
Illustration:
Fine Ltd. a manufacturer with a portfolio of short-term trade receivables (no financing component) from a
large number of small clients.
Solution:
Loss allowance at an amount equal to Lifetime ECL (simplified approach for trade receivables) Entity
creates a provision matrix that is based on its historical observed default rates over the expected life of trade
receivables and adjusts it for forward looking estimates.
Age Default rate (A) Gross Carrying Amount (B) LECL Allowance (A * B)
Current 0.3% 150,00,000 45,000
1 – 30 days 1.6% 75,00,000 1,20,000
31 – 60 days 3.6% 40,00,000 1,44,000
61 – 90 days 6.6 % 25,00,000 1,65,000
90+ days 10.6% 10,00,000 1,06,000
300,00,000 5,80,000
20. Derecognition / Retirement / Removal of FA / FL: (Ind AS-109)

The term “derecognition” refers to when an entity should remove an asset or liability from its balance
sheet. The derecognition requirements in Ind AS 109 set out the conditions that must be met in
order to derecognize a financial asset or financial liability and the computation of any gain or loss
on derecognition. There are separate derecognition requirements for financial assets and financial
liabilities.
20 (a). Derecognition of Financial Assets
Derecognition of a financial asset is appropriate if either one of these two criteria is met:
(1) The contractual rights to the cash flows of the financial asset have expired, or
(2) The financial asset has been transferred (e.g., sold) and the transfer qualifies for derecognition.
Complete Derecognition:
If all the rights / risk / rewards are actually being transferred then derecognition is to be recorded.
If the carrying amount of a financial asset is Rs 6,400 and the entity sells it for cash of Rs 6,500 in a
transfer that qualifies for derecognition, an entity makes these entries:
Various illustrations on derecognition:
Entity Golu holds the Financial Asset:
(1) FVTPL – debt instrument: INR 5000 ; OCI (cumulative balance) : INR 1200 ; Sale proceeds: INR
5400.
Journal:
Cash Dr 5400
OCI Dr 1200
To Asset 5000
To Profit on sale 1600
(2) FVTPL – equity instrument: INR 5000 ; OCI (cumulative balance) : INR 1200 ; Sale proceeds:
INR 5400.
Journal:
Cash Dr 5400
To Asset 5000
To OCI 400
Total OCI = 1200+400 = 1600 will be transferred to General Reserve A/C and not P/L.
No Derecognition: If an entity transfers a financial asset but retains substantially all risks and rewards of
ownership of the financial asset, then Ind AS – 109 requires the entity to continue to recognize the financial
asset in its entirety. No gain or loss is recognized as a result of the transfer. This situation is sometimes
referred to as a failed sale. (It is similar to Repo agreements referred in AS-9)
Partial Derecognition: If an entity has a continuing involvement in the FA even after it is transferred then
it amounts to partial derecognition. Here part of the FA will be derecognised with corresponding gain / loss
and part of the FA will be continued to be recorded.
20 (b) Derecognition of Financial Liabilities
The derecognition requirements for financial liabilities are different from those for financial assets.
There is no requirement to assess the extent to which the entity has retained risks and rewards
in order to derecognize a financial liability. Instead, the derecognition requirements for financial
liabilities focus on whether the financial liability has been extinguished. This means that derecognition
of a financial liability is appropriate when the obligation specified in the contract is discharged or is
cancelled or expires.
21. Reclassification of financial instruments: An entity determines classification of FA and FL on

initial recognition. It is allowed to change such classification at a later date when and only when
there is change in the business for managing FA. Following are the key implications:
(a) No reclassification is permitted for FL.
(b) BM is not applicable for equity instruments. Once equity instruments are designated as FVTOCI
then its reclassification not allowed.
(c) This means FA which is debt instruments requires reclassification. If there is a change in BM
then reclassification is allowed. The change typically is determined by the entity’s senior
management.
Example: An entity has a portfolio of commercial loans for sale (FVTPL). It amalgamates with
another entity whose BM was to collect CCF(Amortised Cost). After merger now the Business Model
is both i.e. CCCF as well as Sale i.e. (FVTOCI).
(d) Reclassification is applicable prospectively and not retrospectively.
For understanding the provisions related to reclassification refer special illustration given below.
Journals for Reclassification:
1. Bonds for ` 1,50,000 at amortised cost is being reclassified as FVTPL
Solution:
Fair Value on reclassification ` 1,18,800
Bonds (FVTPL) A/c 1,18,800
P&L A/c 31,200
To Bonds (Amortised Cost) A/c 1,50,000
2. Bonds for ` 1,50,000 at amortised cost now being reclassified as FVTOCI
Solution:
Bonds (FVTOCI) A/c 1,20,000
OCI A/c 30,000
To Bonds (Amortised Cost) A/c 1,50,000
3. Bonds for ` 2,00,000 at FVTPL now reclassified at amortised cost
Solution:
Bonds (Amortised Cost) A/c 1,20,000
Impairment Loss (Charged to P&L A/c) 80,000
To Bonds (FVTPL) A/c 2,00,000
4. Bonds for ` 1,30,000 at FVTPL now reclassified at FVTOCI
Solution:
Bonds (FVTOCI) A/c 1,00,000
Impairment loss (Taken to OCI A/c) 30,000
To Bonds (FVTPL) A/c 1,30,000
5. Bonds for ` 1,20,000 at FVTOCI now reclassified at Amortised Cost
Solution:
Bonds (Amortised Cost) A/c 1,05,000
Loss Allowance (Taken to OCI A/c) 15,000
To Bonds (FVTOCI) A/c 1,20,000
6. Bonds for ` 1,25,000 at FVTOCI now reclassified at FVTPL

Solution:
Fair Value on reclassification ` 99,000
Bonds (FVTPL) A/c Dr. 99,000
Reclassification Loss (Taken to OCI A/c) Dr. 35,000
To Bonds (FVTOCI) A/c 1,25,000
22. Compound Financial Instruments (Ind AS-109): Sometimes a non - derivative financial
instrument issued contains both liability and equity elements. In other words, one component of
the instrument meets the definition of a financial liability and another component of the instrument
meets the definition of an equity instrument. Such instruments are referred to as compound
financial instruments. The approach to accounting for compound financial instruments is to apply
split accounting, that is, to present the liability and equity elements separately. First apply proceeds
towards the present value / fair value of liability component and then the balancing figure will be
Equity. This is applicable in the books of issuer……….Ind AS: 32.
23. (a) Embedded Derivatives:
It refers to a non - derivative (Host) contract with a derivative element included. This is an arrangement
where derivative element is implicit. For instance, one or more derivative features may be embedded
in a loan, bond, share, lease, insurance contract, or purchase or sale contract. When a derivative
feature is embedded in a non - derivative contract, the derivative is referred to as an embedded
derivative and the contract in which it is embedded is referred to as a host contract.
As per the revised Ind AS – 109 Embedded Derivative is a component of a Hybrid Contract that
also includes a Non–Derivative Host, with the effect that some of the Cash Flows of the Combined
Instrument vary in a way similar to a Stand–Alone Derivative.
Example:
Hybrid Contract Host Contract Derivative Contract
Lease with Contingent rent Lease Contract Contingent Rent
Forex Construction Contract Construction Contract Forex rates
Convertible Debentures Straight Debentures Conversion Option
(b) Accounting for Embedded Derivatives:

Situation 1: Host Asset is a Financial Asset: Record and measure the entire hybrid contract applying Ind
AS-109. No separation of embedded derivative is required.
Situation 2: The Hybrid contract is measured at FVTPL: Record and measure the entire hybrid contract
applying Ind AS-109 as FVTPL. No separation of embedded derivative is required.
Situation 3: Embedded Derivative cannot be separated: Record and measure the entire hybrid contract
applying Ind AS-109. No separation of embedded derivative is required.
Situation 4: Embedded Derivative can be separated: Split and record both the host and derivative item
separately.
When one should say that embedded derivative can be separated:
When the economic characteristics and risks of embedded derivative is not closely related to the characteristics
of the host contract. Also the embedded derivative can be independently recorded as Derivatives.
Lets discuss from the following illustrations whether the embedded derivative can be separated from the
host contract OR Are the embedded derivatives closely related.
Embedded Derivative closely related to the host contract Embedded Derivative not closely related to the host
contract
Call, put options in debt instrument (assuming they are in Convertible Debenture for the issuer.
the money)
Foreign exchange loan….apply Ind AS-21. Equity linked interest or principal.
Lease contract whose rentals are based on Sales.
24. Treasury Shares / Buy Back (In India):

An entity acquires its own shares which are known as buy back in India. In USA it is known as Treasury
shares. In India treasury shares are cancelled, but in other countries it is shown as a deduction from
equity.
Accounting treatment as per Ind AS - 109

When an entity reacquires an outstanding share or other equity instrument, the consideration paid is
deducted from equity. No gain or loss is recognized in profit or loss even if the reacquisition price differs from
the amount at which the equity instrument was originally issued. Similarly, if the entity subsequently resells
the treasury share, no gain or loss is recognized in profit or loss even if the proceeds at reissuance differ from
the consideration paid when the treasury shares were reacquired previously. The amount of treasury shares
is disclosed separately either in the notes or on the face of the balance sheet.
Example
On February 15, 2017, Poshak Ltd issues 100 shares at a price of `50 per share, resulting in total
proceeds of `5,000. It makes this journal entry:
Cash Dr 5,000
To Equity 5,000
On September 12, 2017, Poshak Ltd reacquires 20 of the shares at a price of `100 per share, resulting
in a total price paid of `2,000. It makes this journal entry:
Equity Dr 2,000
To Cash 2,000
25. Hedging:
Hedging as per Ind AS-109:
The purpose of hedging is to eliminate fluctuation / risk by locking a fix rate. By entering into
derivatives contracts (for hedging) one can offset loss in one contract by the gain in another contract.
(i) Components of hedging:
ww A hedged item: A hedged item is an asset, liability, firm commitment, highly probable forecast
transaction, or net investment in a foreign operation. To be designated as a hedged item, the
designated hedged item should expose the entity to risk of changes in fair value or future cash
flows.
ww A hedging instrument: A hedging instrument is a financial instrument, expected to offset
changes in the fair value or cash flows of the hedged item. In addition, the hedging instrument
must be with an external party.
Example: Arvind Exporters entered into a forward contract for receiving a fixed amount $5,00,000 after
3 months. Here the hedging item is amount receivable (asset) and hedging instrument is the forward
contract.
A hedging instrument should be effective in managing the risk of the hedged item.
Ind AS-109 identifies three types of hedging relationships:
(1) Fair value hedges – which hedges (manages) the exposure relating to changes in fair value of an item
or transaction. FVH provides protection against changes in the FV of asset / liabilities. Ex: Protecting
fixed income security against falling interest rates where FV of the financial instrument is exposed
to risk. X Ltd maintains an inventory of cocoa that it uses in production of chocolate. X Ltd takes a
forward cover to hedge the fair value of cocoa inventory.
(2) Cash flow hedges - which hedges (manages) the exposure relating to expected cash flows. In other
words it hedges the exposure on account of cash flows from any (i) recognised asset or liability
ex: interest receipt / payment of a recognised floating bond and not fixed bond because fixed rate
bond has fixed income hence no hedging required. (ii) highly probable forecasted sale or purchase
transaction ex: Sale going to take place in future, raw materials yet to be purchased in future.
Some important distinctions between FVH and CFH
Fair value hedge (FVH) Cash flow hedge (CFH)

Protects the asset / liability Protects the future cash flows
Gain / loss transferred to profit / loss a/c Effective portion transferred to equity and ineffective
portion to profit / loss a/c
(3) Hedges of a net investment in a foreign operation - which hedges (manages) the exposure relating
to foreign operations.
Hedge accounting
(1) Fair value hedges – hedging instrument should be re-measured at fair value, with the gain or loss
transferred to profit and loss account. But if the hedging item is equity instrument classified as
FVTOCI then the gain / loss of hedging instrument is transferred to OCI. If the hedging item itself
is a financial asset which is not an equity instrument but classified as FVTOCI then the revaluation
difference will go to profit / loss account and not OCI.
(2) Cash flow hedges – hedging instrument should be split between effective portion and ineffective
portion. Effective portion transferred to Hedging Reserve through OCI and ineffective portion
transferred to profit / loss account. Inefficiency is computed for over hedging and not under - hedging.
(3) Hedges of a net investment in a foreign operation – same as cash flow hedge.
Problems and Solutions

Problem 1: Classification of financial instruments into FL or equity.
Particulars (Remember it is books of issuer company) E / FL Reasons
Preference shares redeemable at a future date for specified amount
Preference shares redeemable by virtue of put option excisable by the holders
Preference shares which do not provide mandatory redemption
Preference shares will be redeemed subject to profits / government approval,
availability of cash
Preference shares will be redeemed at the option of the issuer
Compulsory payment of dividend
X Ltd issues 10% PS redeemable after 5 years
X Ltd issues 10% PS which is perpetual

X Ltd issues 10% PS which is perpetual and the dividend will be decided by the
Board
10% Loan semi-annual interest but no repayment clause.
Solution:
Particulars E/
Reasons
(Remember it is books of issuer company) FL
Obligation to pay dividend FL Obligation to pay cash
Preference shares redeemable at a future date for specified FL Contractual obligation to pay cash
amount
Preference shares redeemable by virtue of put option excisable FL Contractual obligation to pay cash
by the holders
Preference shares which do not provide mandatory E Company has an unconditional right to refuse
redemption redemption. No contractual obligation to pay
Preference shares will be redeemed subject to profits/ FL No unconditional right to avoid delivering cash
government approval, availability of cash hence FL. Potential redemption inability does not
negate the obligation
Preference shares will be redeemed at the option of the issuer E Company has an unconditional right to refuse
redemption
No contractual obligation to pay
Compulsory payment of dividend FL Distribution of dividend is a liab. to pay
X Ltd issues 10% PS redeemable after 5 years FL Contains redemption obligations
X Ltd issues 10% PS which is perpetual E Contains no redemption obligations But if
dividends are cumulative (to pay compulsory
anytime)then it is FL.
Div are non cumulative then it is Equity.
X Ltd issues 10% PS which is perpetual and the dividend will E Contains no redemption obligations. Also
be decided by the Board dividends are like non cumulative.
10% Loan semi-annual interest but no repayment clause. FL Obligation to pay interest is enough to treat the
FI as FL
Problem 2: Classify the following Financial Assets:

(1) Investments in open ended MF debt option.
(2) Share application money paid pending allotment.
(3) Investments in 10% Bonds strictly for sale in a short term.
(4) Investments in Zero Coupon Bonds for 5 years for a liability immunization.
(5) Investments in 7.5% Preference Shares @ INR 106. The repayment of capital and dividend both are
at the discretion of the issuer.
(6) Put options in Nifty Index.
(7) Forward contract for gross delivery of Zinc at an exercise price fixed as on today.
(8) Investments in 6% Convertible Bonds.
Solution: In the books of investor:
(1) For issuer it is not an equity instrument as there is no obligation to pay. Hence for the investor it
is also not an equity investment. Debt and FVTOCI not possible as SPPI test is negative. Hence its
FVTPL.
(2) Equity for issuer. For investor it cannot be debt instrument. Also share application money is not
held for trade. Hence it is FVTPL. Remember no revaluation can take place as equity shares are still
pending.
(3) FVTPL.
(4) Amortised cost.
(5) For issuer it is equity. Hence for investor it cannot be amortised cost. If it is assumed that it is held for
trading then FVTPL otherwise FVTOCI.
(6) Derivative for net settlement. FVTPL. (remember Nifty is always settled net)
(7) Does not require any FA classification as the instrument is exclusively held for hedging. It is derivative
but not FA / FL.
(8) For issuer Conv Bonds are not equity in its entirety. Hence for investor it is not equity. Also SPPI test
fails for Conv bonds. For investor it is FVTPL. Remember FVTPL is also a residual category.
Problem 3: Classify the following into Derivative and Non – Derivative instruments:
(1) MNL Limited whose functional currency is ₹ sells furniture in France denominated in Euro. The
exchange rate is fixed with the bank at 72 per Euro.
(2) A option proved to be out of the money on settlement date.
(3) Entity A makes a 5 year fixed interest rate loan to Entity B. On the other hand Entity B makes 5 year
variable interest rate loan to Entity A. No exchange of principal took place at inception.
(4) K Ltd has paid premium equal to the spot price as the option is very much deep in the money.
(5) XYZ paid 10% margin on a long position of SBI futures.
Solution:
(1) Yes. Initial investments Nil. Underlying asset Euro (foreign currency). Also settled on a later date.
(2) Yes. Options out of the money are also supposed to be settled. The holder has a right to lapse the
contract.
(3) Yes. No initial investment. Settled on a later date. Underlying asset is interest rates fixed minus
floating which can be gain or loss.
(4) No. The premium paid on options generally fulfills the requirement of little or no initial investment.
Here the investments in options are equal to the cash market.
(5) No. Margins are just collaterals / deposits. They themselves are not derivatives.
Problem 4: Classify the following into FL or Equity (Issuer):
(1) B Ltd short its own 1,000 equity shares at an exercise price of ₹ 145. The delivery of shares will be
after 3 months.
(2) Contract to deliver as many of the entity’s own instruments equal to ₹ 5,00,000.
(3) Laggu Ratan Limited issued 10 lakhs 6% Convertible Debentures of ₹ 100 at ₹ 109.
(4) FCCB.
Solution 4:
(1) Equity (fix for fix rule)
(2) FL (For an obligation of ₹ 5,00,000 it will be settled in entity’s own variable number of shares).
(3) PV of cash flows component is FL and residual value as equity.
(4) In Ind AS it is Embedded derivative. PV of cash flows component is FL and residual value as equity.
Problem 5: Forward Contracts – Speculation i.e. FVTPL:
A party enters into forward contract for trading or speculation. Contract is to sell $ 100000 due on 30.06 @
` 47.50. Today (1st January) spot @ is `47. On 31st March (yearend) the forward contract for 3 months (i.e.
remaining maturity period upto 30.06) to sell $ is available @ `47.55. Rate on 30.06 is `47.60. Journalise the
entries as per AS- 11 [R]. Assume both transaction and settlement method of accounting.
Solution:
Journal Entries in the books of Speculator:(assuming transaction date method)
Date Particulars Dr. ` Cr. `

(assuming trade date method)
1.1. Foreign Contract entered into
Financial asset A/C. Dr (due from Bk) 47,50,000
To Financial liability A/C. 47,50,000
$1,00,000 x 47.50
31.3. Mark – to – Market the Contract
Profit / loss A/C. Dr 5,000
To Financial liability A/C. 5,000
(Forward Contract is valued on MTM @47.55 forward @ available for
3months)
30.6 Mark – to – Market at final rate
Profit / loss A/C. Dr. 5,000
30.6 Final Square – off of the Contract
Financial liability A/C. Dr 47,60,000
To Financial asset A/C. (d 47,50,000
(due from Bank) 10,000
To Bank A/C.
(assuming settlement date method)
31.3. Mark – to – Market the Contract
(Forward Contract is valued on MTM @47.55 forward @ available for
3months)
30.6 Mark – to – Market at final rate
30.6 Final Square – off of the Contract
Financial liability A/C. Dr. 10,000
To Bank A/C. 10,000
Problem 6: Options accounting - books of both buyer and seller:

Date of Type of Expiry Date Market Lot Premium Per Strike Price
Purchase Options Unit
29 June 2011 A Ltd. – call August 30, 2011 100 30 400
30 June 2011 B Ltd. – Put August 30, 2011 200 40 500
Stock price of A Ltd. and B Ltd. on 30th August 2011 is ` 420 and ` 480. Journalize the entries in the books
of buyer.
Solution:
BOOKS OF MR.X (OPTION HOLDER)
Journal Entries
Date Particulars Dr.` Cr.`
29.06.2011 Option Premium A/c (Financial asset) Dr 3,000
To Bank. A/c. 3,000
(Being option premium paid for call option of A Ltd.)
30.06.2011 Option Premium A/c Dr. 8,000
To Bank.A/c. 8,000
(Being option premium paid for put option of B Ltd.)
30-08-2011 Bank A/c Dr. 6,000
Profit / Loss A/c. 5,000
To Option Premium (FA) A/c 11,000
(Being profit / loss recognized.)
Call: (`420 – `400) *100 = `2,000
Put: (`500 – `480) * 200 = `4,000
Problem 7: Definition of derivative: (CA Final Nov 2010, Nov 2011, Nov 2015 May 2016)
M/s TS Ltd has entered into a contract by which it has the option to sell its specified asset to NB Ltd for
`100 Lakhs after 3 years whereas the current market price is `150 Lakhs. Company always settles account
by delivery. What type of option is this? Is it a Financial Instrument? Explain with reference to the relevant
Accounting Standard.
Solution: TS Ltd has an “Option to Sell” the underlying asset. Hence, it is a Put Option Contract. But as the
past practice is to settle the option is by delivery hence it is not a financial instrument. But if the past practice
is to settle on net cash basis then it is a FI. Put / Call option is a derivative instrument but may or may not be
a Fin. Ins.
Delivery based derivative contracts are not FI.
Problem 8: Accounting for Forward Contracts - FVTPL
On 1st February 2009, Future Ltd entered into a contract with Son Ltd, to receive the Fair Value of
1000 Future Ltd.’s Own Equity Shares Outstanding as on 31-01-2010 in exchange for payment of
`1,04,000 in cash, i.e. ` 104 per Share. The contract will be settled in net cash on 31-01-2010.
The Fair Values of this forward contract on the different dates were:
Fair Value of forward on 01-02-2009 Nil
Fair Value of forward on 31-12-2009 `6,300,
Fair Value of forward on 31-01-2010 ` 2,000
Presuming that Future Ltd, closes its books on 31st December each year, pass entries – If net settled in cash
and If net is settled by Son Ltd, by delivering Shares of Future Ltd.
(CA Final Nov 2010 Marks 8)
Solution:
1. Journal Entries (Cash Settlement)
01.02.2009 Fair Value of a Derivative contract is Nil on initial recognition date.
31.12.2009 Year end
Forward Contract A/c Dr. 6,300
To Profit and Loss A/c 6,300
(Being Increase in Fair Value of Forward Contract)
31.1.2010.
Profit and Loss A/c Dr. 4,300
To Forward Contract A/c 4,300
(Being Decrease in value of Forward Contract recorded)
31.1.2010 Settlement of Net Receivable by Cash
Bank A/c Dr. 2,000
(Being Settlement of Forward Contract by Cash)
2. Journal Entries (Settlement of “net” amount by shares)
First three journal entries are the same as above for Cash Settlement. The final entry will be as
follows —
31.1.2010 : Settlement - by delivery of Shares of Future Ltd.
Equity Shares of Future Ltd (Own Shares) A/c Dr. 2,000
(Settlement of Forward Contract by receipt of Shares of Son Ltd own equity shares)
No of shares = 18.87 = 2,000 / 106 = (1,04,000+2,000) / 1,000 = 106 → todays market price.
Problem: 9 Option accounting : FVTPL
On 1/1/2015 Appu Ltd purchased 4000 call options of Gammon Ltd at a strike price of Rs 700. Premium paid
Rs 40 per unit. The option will expire on 1/5/2015. Pass journal entries if the options are settled in net cash
assuming:
Year ended 31/3/2015 Settlement date 1/5/2015

Case 1: Market price Rs 690 Rs 720
Solution: Journal Entries in the books of Appu Ltd.

Case 1 Case 2 Case 3
1/1/2015 1/1/2015 1/1/2015
Financial Asset Dr 160000 Financial Asset Dr 160000 Financial Asset Dr 160000
To Cash 160000 To Cash 160000 To Cash 160000
31/3/2015 31/3/2015 31/3/2015
P / L Dr 160000 P / L A/C 160000 P / L A/C 40000
To Prov for loss 160000 To Prov for loss 160000 To Prov for loss 40000
160000 - [(730-700)x 4000]
1/5/2015 1/5/2015 1/5/2015

Prov for loss Dr 160000 Prov for loss Dr 160000 Cash Dr 280000
To Financial Asset 160000 To FA 160000 (770-700)4000
Cash Dr 80000 Prov for loss Dr 40000
To Profit / loss 80000 To FA 160000
(720-700)4000 To P/L 160000
Problem 10: Zema Limited is short in Dabur India Futures. Details are as follows:
Position: Short
Scrip: Dabur India Futures
Quantity: 10 contracts
Lot – size: 100 shares
Brokerage: 1.2%
Initial Margin: 10%
Maintenance Margin: 75% of initial margin
Tradqe date: 9/1/2017
Settlement date: 30/9/2017
Exercise Price: ₹544
Spot price: ₹506
Method of settlement: Net Cash
Prices on various dates provided to you:
Dates Spot Price ₹ Futures Price ₹ FV of Derivative

9/1/2017 506 544 Nil
31/3/2017 541 556 (12000)
30/6/2017 546 567 (23000)
10/7/2017 550 552 (8000)
Pass necessary journals:
Solution:
(1) Initial margin = ₹ 54400.
(2) Maintenance margin = 0.75 x 54400 = ₹ 40800. If the margin accounts goes below MM then a margin
call is made to the extent of Initial margin.
(3) Instead of Margin a/c we can also make Financial Asset A/C.
Journals:
9/1/2017: Derivatives futures initially is recognized at Nil
Margin A/C Dr 54400
To Cash A/C 54400 (10x100x544x10%)
Brokerage A/C Dr 653 54400
To Cash A/C 653
31/3/2017: Profit / loss A/C Dr 12000
To Margin A/C 12000 (544-556) x 10 x 100
Profit / loss A/C Dr 653
To Brokerage A/C 653
30/6/2017: Profit / loss A/C Dr 11000
To Margin A/C 11000 (556-567) x 10 x 100

Margin A/C Dr 23000
To Cash A/C 23000 (margin call made)
10/7/2017: Margin A/C Dr 15000
To Profit / loss A/C 15000 (567-552) x 10 x100
Cash A/C Dr. 69400
To Margin A/C 69400
Problem 11: Option accounting in the books of Buyer: FVTPL+Equity
Chabban Limited has sold 6 months 10,000 Call Option on its own shares at a premium of ₹ 40 on 1/3/2016.
Exercise price is set at ₹ 220. On 31/3/2016 the Market value of the share went up to ₹ 300. The Market price
on the settlement date i.e. 30/6/2016 is ₹ 306. Pass journal entries in the following cases: (i) Assume options
are settled net cash ; (ii) Options settled on net own equity shares (also calculate No. of ES); (iii) Options
settled by gross delivery of sown equity shares. Face Value = ₹ 10.
Solution: Journal Entries in the books of Chabban Ltd.(writer of the option)
Case 1: Net Cash Case 2: Net ES Case 3: Gross Delivery
1/3/2016 1/3/2016 1/3/2016
Cash Dr. 4,00,000 Cash Dr. 4,00,000 Cash Dr. 4,00,000
To FL 4,00,000 To FL 4,00,000 To Equity 4,00,000
31/3/2016 31/3/2016 No Entry
Profit / loss Dr 4,00,000 Profit / loss Dr 4,00,000
To FL 4,00,000 To FL 4,00,000
1/5/2015 1/5/2015 1/5/2015
FL Dr 8,00,000 FL Dr 8,00,000 Cash Dr 22,00,000
Profit / loss Dr 60,000 Profit / loss Dr 60,000 Equity Dr 4,00,000
To Cash 8,60,000 To Equity 8,60,000 To ESC 1,00,000
To Sec. Premium 25,00,000
FL = Financial liability.
Problem 12: Forex Debt instrument as FVTOCI:

Broadways Leaps whose functional currency is INR purchases USD denominated bond at its fair value of $
1,000. The bond carries stated coupon 4.7% p.a. on its face value. The bond will be redeemed after 5 years at
a face value of $ 1250. The Fair Value of the bond at the end of the year1 is USD 1,060. Exchange rates were:
Opening rate: 1$ = INR 40
Closing rate: 1$ = INR 45
Average rate: 1$ = INR 42
The business model of Broadways Leaps is to keep the investment for both sale as well as to collect contractual
cash flows. Hence it is classified as FVTOCI.
Also the market yield is 10% p.a.
Pass journals for the first year.
Solution:
Step 1: Fair Value of Asset = $ 1000
Step 2: Amortization for year1:
Opening value + Effective yield – Cash recd = Closing balance
$ 1000 + 1000 x 10% - 1250 x 4.7% = Closing balance
1000+100-58.75 = $ 1041.25
But Fair Value = $ 1060.

Fair value gain = 1060 – 1041.25 = $ 18.75 (FVTOCI)
USD INR
Initial Recognition: FVTOCI a/c Dr 1000 FVTOCI a/c Dr 40000
To Cash 1000 To Cash 40000
(1000 x 40)
Annual Interest FVTOCI a/c Dr 100 FVTOCI a/c Dr 4200
To Interest 100 To Interest 4200
(100 x 42)
Coupons received Cash a/c Dr 58.75 Cash a/c Dr 2643.75
To FVTOCI 58.75 To FVTOCI 2643.75
(58.75 x 45)
Fair Valuation FVTOCI a/c Dr 18.75 FVTOCI a/c Dr 843.75
To OCI 18.75 To OCI 843.75
(18.75 x 45)
Exchange gain / loss: AS-11 or Not applicable FVTOCI a/c Dr 5300
Ind AS - 21 To Exchange gain 5300
(1060 x 45 – FVTOCI balance)
Problem 13: Amortised cost:

A debt security of Gappi Listings has a stated principal amount of ₹ 100,000, which will be repaid by the
issuer at maturity in five years, and a stated coupon interest rate of 6% per year payable annually at the end
of each year until maturity (i.e., Rs 6,000 per year).
Angel finances purchases the debt security in the market on January 1, 2011, for Rs 93,400 (including
transaction costs of Rs 100), that is, at a discount. Angel Fin classifies the debt security as held to maturity.
Show journals for each year. (IRR – 7.64%)
Solution: Holder should treat the instrument at Amortised Cost:
(i) First we have to calculate IRR for applying effective interest rate principal.

Yr cash flow
0 -93400
1 6000
2 6000
3 6000
4 6000
5 106000
IRR @7.64%
Schedule of cash flows with effective interest calculations:
Year Opn invs cash int Effective Amortization Closing

Interest of discount HTM
0 93400 93400
1 93400 6000 7136 1136 94536
2 94536 6000 7225 1225 95761
3 95761 6000 7316 1316 97077
4 97077 6000 7417 1417 98494
5 98494 6000 7525 1525 100000
2011
Beginning
Investm Dr 93400
To Cash 93400
End 2001 2002 2003 2004

Cash Dr 6000 6000 6000 6000
Investments 1136 1225 1316 1417
To Int income 7136 7225 7316 7417
2015
Cash Dr 6000
Investments Dr 1525
To Int income 7525
Cash Dr 100000
To Investments 100000
Problem 14: Amortised cost: - Zero Coupon Bond

Mahan Securities Ltd acquires 4 years 5,000 ZCB of ` 100 each. The issue price is ` 74. Pass journals for all
the 4 years assuming M Securities held the investments till maturity.
Solution: Amortised Cost for investor:
First lets calculate IRR
Year Cash flow
0 -74
1 0
2 0
3 0
4 100
IRR @7.8%
7.8182%
Effective Amortiz of
Year Opn. Bal. Cash int Interest discount Closing
0 370000 370000
1 370000 0 28934 28934 398934
2 398934 0 31197 31197 430131
3 430131 0 33636 33636 463767
4 463767 0 36234 36234 500000
Year 1
Beginning
Investments in ZCB Dr 370000
To Cash 370000
End Yr1 Yr2 Yr3

Cash Dr 0 0 0
Investments in ZCB Dr 28934 31197 33636
To Int income 28934 31197 33636
Year 4
Cash Dr 0
Investments in ZCB Dr 36234
To Int income 36234
Cash Dr 500000
To Investments in ZCB Dr 500000
Problem 15: Amortised cost: (CA final May 2010 marks 12 , May 2012 marks 8, Nov 2015 marks 8)
ABC Ltd grants loan ` 10,00,000 to its employees on January 1, 2008 at a concessional interest rate of 4% p.a.
loan will be repaid in 5 equal annual installments along with interest. Market rate of interest for such loan is
10% p.a. Pass journals for first 2 years.
Solution:
Calculation of initial recognition amount of loan - that will be discounted present value of future cash flows
from the re-payment of the loan.
Year end Cash in flows Total Discount factor Discounted Value
at 10%
Principal Interest
2009 2,00,000 40,000 2,40,000 0.9090 2,18,160
2010 2,00,000 32,000 2,32,000 0.8263 1,91.702
2011 2,00,000 24,000 2,24,000 0.7512 1,68,268
2012 2,00,000 16,000 2,16,000 0.6829 1,47,506
2013 2,00,000 8,000 2,08,000 0.6208 1,29,126
Present Value or Fair Value 8,54,762
Journal Entries
1-1-2009

Staff Loan A/c Dr. 8,54,762
Staff Cost Dr. 1,45,268
To Bank 10,00,000
(As the fair value of loan is ` 8,54,762 it will be initially recognized at this value balance amount
debited to staff cost account)
Calculation of amortized cost at the end of each year
Interest to be Re-payment
Year Balance Amortised cost
recognized (10%) (including interest)
2009 8,54,762 85,476 2,40,000 7,00,238
2010 7,00,233 70,024 2,32,000 5,38,262
2011 5,38,262 53,826 2,24,000 3,68,088
2012 3,68,088 36,809 2,16,000 1,88,897
2013 1,88,897 19.103* 2,08,000 NIL
*Balancing figure (rounding off)

Entry for 2009
Staff Loan A/c Dr. 85,476

To Interest on Staff Loan 85,476
Bank A/c Dr.
2,40,000
To Staff Loan 2,40,000
Interest on Staff Loan Dr. 85,476
To Profit & Loss A/c 85,476
Problem 16: Interest rate swap:

Company A has outstanding debt on which it currently pays fixed rate of interest at 9.5%.
The company intends to refinance the debt with a floating rate interest. The best floating rate it can obtain is
LIBOR + 2%. However it does not want to pay more than LIBOR.
Another Company B is looking for a loan at a fixed rate of interest to finance its exports. The best rate it can
obtain 13.5%, but it cannot afford to pay more than 12%. However, one bank has agreed to offer finance at a
floating rate of LIBOR + 2%. Citi Bank is in the process of arranging an interest rate swap between these two
companies.
(a) With a schematic diagram, show how the swap deal can be structured.
(b) What are the interest savings by each company?
(c) How much would Citi Bank receive?
Solution:
Aforesaid question can be structured as follows:
Cost of Debt
Company Target Fixed Rate Floating Rate
A Floating 9.50% p.a. LIBOR + 2%
B Fixed 13.50% p.a. LIBOR + 2%
Difference 4% 0%
(a) Schematic diagram for above swap deal will be follows:
Step 4 Step 5
Citi Bank
Step 3
Step 6
Libor B.G.
Libor
Company A Company B
Step 2
Step 1
9.5% to Outside Libor + 2% to

Lenders Outside Lenders
Functioning ofswap deal - Stepwise:

Step 1: Company A pays 9.5% per annum (fixed rate) to lenders.
Step 2: Company B pays LIBOR+2% (floating rate) to lenders.
Step 3: Company A receives interest from bank @ 9.5% per annum as compensation forfixed rate loan.
Step 4: Company A pays LIBOR to bank (as it is the target).
Step 5: Citi Bank transfers LIBOR to company B to pay lenders.
Step 6: At last, Company B pays 10% (balancing figure) to bank. Hence, cost to Company B will be: 10% (to Bank)
+ 2% (to lenders, extra) = 12%.
The structure of swap deal can be summarised as follows:
Company Target Savings Net Cost Paid to Received Paid to

Market from Bank Bank
A (LIBOR+2%) - (LIBOR) = 2% LIBOR 9.5% 9.5% LIBOR
B 13.5%- 12%= 1.5% 12% LIBOR+2% LIBOR 10% (B.F.)
(a) Interest saving by each company :

As discussed above, if company A takes fixed rate debt and company B takes floating rate debt, then
there is total savings of 4% (13.5% - 9.5%) can be made.
Since, Company A cannot afford more than LIBOR so, its target savings would be 2% [(LIBOR + 2%)
– LIBOR]. So, it needs 2% share out of total 4% savings.
Further, Company B cannot afford more than 12% so, its target savings would be 1.5% [13.5% -
12%]. So, it needs 1.5% share out of total 4% savings. Therefore, the balance is 0.5% [4% - 2% -
1.5%] which will be charged by Citi Bank.
(b) As per the above analysis, Citi Bank would receive 0.5%.
Solution:
BOOKS OF A LTD
Journal Entries
S. No. Particulars Dr. ` Cr. `
9.5% Fixed Advance A/c Dr 100
(1) To Citi Bank A/c 100
(being fixed rate advance granted to Citi Bank)
Citi bank A/c Dr 100
(2) To LIBOR Loan A/c 100
(Being floating loan received from Citi bank)
Interest A/c DR 9.5
(3) To Outside lender A/c 9.5
(Being interest paid to outside lender.)
Citi Bank A/c Dr 9.5
(4) To Interest A/c 9.5
(being interest on advance given to Citi Bank)
Interest A/c Dr 10
(5)
To Citi bank A/c 10
(being interest on loan obtained from Citi ban.)
(6) P&L A/c Dr 10 10
To Interest A/c
(being interest expenditure transferred to P & L A/c.)
Citi Bank A/c Dr 0.5 0.5
To Bank A/c
(7)
(Being amount paid to Citi Bank on interest difference between loan and
advance.)
Problem 17: Securitisation of Loans: Derecognition

(i) Arul Ltd holds `50,000 of loans yielding 18% interest p.a. for their estimated lives of 9 years. The
company securitizes the principal component and the right to receive interest at 14% to B Ltd a SPV.
Out of the balance interest of 4%, it is stipulated that half of such balance interest namely 2%, will
be due to Arul as fees for continuing to service the loans. The costs likely to be incurred in servicing
the loan estimated to be Rs. 400. The remaining half of the interest is due to Arul as an interest strip
receivable. IRR is 13%. Give a/c treatment. (CA final June 2009)
(ii) Sea Ltd. has lent a sum of ` 10 lakhs @ 18% per annum for 10 years. The loan had a Fair Value of `
12,23,960 at the effective interest rate of 13%. To mitigate prepayment risks but at the same time
retaining control over the loan Sea Ltd. transferred its right to receive the Principal amount of the
loan on its maturity with interest, after retaining right over 10% of principal and 4% interest that
carries Fair Value of ` 29,000 and ` 1,84,620 respectively. The consideration for the transaction was
` 9,90,000. The interest component retained included a 2% fee towards collection of principal and
interest that has a Fair Value of ` 65,160. Defaults if any are deductible to a maximum extent of
the company’s claim on principal portion. You are required to show the journal Entries to record
derecognition of the loan. (Nov 2013)
Solution:
As part of the loan is sold we have to split up the loan into various strips at Fair Value. For this purpose we
have to calculate PV of loan (cash flows)
Principal 14% Interest 2% Interest 2% Interest
(trf) (trf) (service fee) (right to
retain int retained)
Cash Flows 50,000 7000 600 1000
(1000 - 400)
PVF @ 13% 0.295 5.426 5.426 5.426 total
Fair Value = 14750 37982 3256 5426 61414
Ratio based on
Fair Value 24% 62% 5.30% 8.70% 100%
Bank a/c 52732 (14750 + 37982)

To Loan 43000 (50000 x 86%)
To Profit 9732
(Loan sold @Fair Value and credited @carrying amount)
Interest receivable 2650 (50000 x 5.3%)
Service Fee receivable 4350 (50000 x 8.75%)
To Loan 7000
(Int. and fee receivable is restated at carrying amt. in the ratio of fair value)
Its derecognition of loan and recognition of Int and fee rec.)
Problem 18: Amortised cost:
FEE Ltd. borrows a sum of ` 20 crore from COFEE Ltd. repayable as a single bullet payment at the end of 5
years. The interest thereon @ 5% is payable at yearly rests. Since the market rate is 8% FEE Ltd. paid an
origination fee of ` 2.40 crores to COFEE Ltd. for the lower rate of interest. Apart from the above, there are
no other transactions between the two parties. You are required to show the value at which COFEE Ltd. would
recognise the loan and the annual interest thereon. (CA Final Nov 2011)
Solution:
Effective interest Cash Interest Amort. O/S
0 1760.00
1 140.80 100.00 40.80 1800.80
2 144.06 100.00 44.06 1844.86
3 147.59 100.00 47.59 1892.45
4 151.40 100.00 51.40 1943.85
5 155.51 100.00 55.51 2000.00
(a) Since, the Origination Fee is attributable to the Loan, the said cash flow is also adjusted against the
Loan Receivable = 20 crores – 2.4 crores = 17.60 crores.
(b) Loan Receivable from FEE Ltd is in the nature of a Financial Asset in the books of COFEE Ltd. therefore,
it should be carried in the Financial Statements at Fair Value determined using the Effective Interest
Rate.
Accounting entry: Books of COFFEE LTD.
On loan given to FEE LTD:
Loan to Fee Ltd (Financial Asset) Dr 20 crores
To Bank 20 crores
On receipt of origination fee:
Bank Dr 2.4 crores
To Loan to Fee Ltd (Financial Asset) 2.4 crores
Problem 19: Compound Financial Instrument: (Asked 7 times in CA Final)
On 1st April 2008 Delta Ltd issued `30,00,000 6% Convertible debentures of ` 100 per debenture @par. The
debentures will be redeemed on 31/3/2012 10% premium or given an option to the holder to convert it into
equity shares. The interest rate without conversion option will be 10% for similar debentures.
Split the compound financial instruments into equity and debenture.
Solution:
PV of Redemption amount 22,44,000
(3300000 x 0.68)
PV of interest payments 5,70,600
(180000*3.17)
PV of liability 28,14,600
Less: Cash received
3000000
Equity Component
1,85,400
Year 1:
Cash Dr 3000000
To Debt 2814600
To Equity Suspense 185400
Interest expense Dr 281460

To Debt 281460
Debt Dr 180000
To Cash 180000
Year 4:
Following entry will be passed on the date of conversion: (assume 2,00,000 shares on conversion)
If Debentures Converted:
Debt Dr 33,00,000
Equity suspense Dr 1,85,400
To Equity share capital 20,00,000
To Securities premium 14,85,400
If Debentures redeemed:
Debt Dr 33,00,000
To Cash 33,00,000
Equity suspense Dr 1,85,400
To General Reserve 1,85,400
Problem 20: Compound Financial Instrument:

Certain callable convertible debentures are issued at `60. The value of similar debentures without call or
equity conversion option is `57. The value of cal as determined using Black and Scholes model for option
pricing is `2. Determine the values of liability and equity component.
Solution:
Entry:
Cash a/c Dr 60
Call Option a/c Dr 2 (Financial asset)
To Debentures 57 (pure liability component)
To Equity (bal fig) 5 (bal fig)
Problem 21: Embedded Derivatives
On 1 April 2018 Imagica Limited issued 70 lakhs 8% Convertible Debentures of face value ` 100 per
debenture at 6% premium. The Debentures will be compulsorily converted at the end of 4 years. Debentures
without conversion rights will pay an interest of 9% p.a. Conversion ratio will be 6 equity shares for every
1 debenture held. Face value of equity share is ` 10. Split the component of Debt and Equity. Pass journals for
2018-19 and 2021-22.
Solution: (` in lakhs)
Year Cash flows PVAF9% PVACF

4 years 560 3.239 1813.84
Redpt. 0 0 0
Journals
2018-19 (1st year) Opening bal = 1813.84
Cash Dr. 7,420 + Interest 9% = 163.25
To 8% Debentures 1,813.84 (–) Cash paid = (560)
To Equity suspense 5,606.16 Amortised Cost = 1417.09
Finance expenses Dr. 163.25 + Interest 9% = 127.54
Amortization
To Debentures 163.25 (–) Cash paid = (560)
Debentures Dr. 560 Amortised Cost = 984.62
To Cash Dr. 560 + Interest 9% = 88.60
table
2021-22 (last year) (–) Cash paid = (560)
Finance expenses Dr. 46.76 Amortised Cost = 513.24
To Debentures 46.76 + Interest 9% = 46.76 (round off )
Debentures Dr. 560 (–) Cash paid = (560)
To Cash Dr. 560 Amortised Cost = Nil
Equity Suspense Dr. 5606.16
To Equity Share Capital 4200 ** ** Equity is an embedded derivative but cannot be revalued
To Securities Premium 1406.16 as it is equity.
(` 5606.16 is the effective consideration already received) At the end of derecognition the company issued fixed
shares for fixed price.
No of equity shares = 70 lakhs × 6 = 420 lakhs
Problem 22: Equity expenses:

Entity B places its privately held ordinary shares that are classified as equity with a stock exchange and
raises loan. It also simultaneously raises new capital by issuing new ordinary shares on the stock exchange.
Transaction costs are incurred in respect of both transactions. Determine the treatment of the incurred
transactions costs?
Solution:
Since the issue of new shares is the issue of an equity instrument, but the placing of the existing equity
instruments with the exchange is considered raising of loans. The transaction costs will need to be allocated
between the two transactions. Transaction costs in respect of the new shares issued will be recognised in
equity whereas the transaction costs incurred in placing the existing shares with the stock exchange will be
recognized in profit or loss.
Problem 23: Classification : E and FL
An entity issues a non-redeemable callable subordinated bond with a fixed 6% coupon. The coupon can be
deferred in perpetuity at the issuer‘s option. The issuer has a history of paying the coupon each year and the
current bond price is predicated on the holders expectation that the coupon will continue to be paid each
year. In addition the stated policy of the issuer is that the coupon will be paid each year, which has been
publicly communicated. Evaluate?
Solution:
Although there is both pressure on the issuer to pay the coupon, to maintain the bond price, and a constructive
obligation to pay the coupon, there is no contractual obligation to do so. Therefore the bond is classified as
an equity instrument.
Problem 24: Classification:

Entity A holds an option to purchase equity shares in a listed entity B for ` 100 per share at the end of a 90
day period. Evaluate the contract whether a financial asset or a financial liability? What if the entity A has
written the option?
Solution:
The above call option gives entity A, a contractual right to exchange cash of ` 100 for an equity share in
another entity and will be exercised if the market value of the share exceeds `100 at the end of the 90 day
period. If the market value of a share will be such that the entity A will gain on the exercise date, it will
exercise the call option.
Since entity A stands to gain if the call option is exercised, the exchange is potentially favourable to the entity.
Therefore, the option is a derivative financial asset from the time the entity becomes a party to the option
contract.
On the other hand, if entity A writes an option under which the counterparty can force the entity to sell equity
shares in the listed entity B for ` 100 per share at any time in the next 90 days, then entity A will be said to
have a contractual obligation to exchange its equity shares to another entity for cash of ` 100 per share on
potentially unfavourable terms i.e. if the holder exercises the option, on account of the market price per share
being above the exercise price of ` 100 per share at the end of the 90 day period. Since entity A stands to lose
if the option is exercised, the exchange is potentially unfavourable and the option is a derivative financial
liability from the time the entity becomes a party to the option contract.
Problem 25: Bank A lends loan of INR 40,00,000 to Holly Inc. It incurs transactions costs Rs. 20,000. It
receives processing charges INR 50,000. Compute the Fair Value of the Financial Instruments in the respective
book of Bank A and Holly Inc.
Solution:
Fair Value for Bank A:
Cash paid = 40,00,000
Less: Fees received (50,000)
Add: Transaction cost 20,000
Fair Value: 39,70,000
Fair Value for Holly Inc.:
Cash received = 40,00,000
Add: Transaction cost 50,000
Fair Value: 40,50,000
Problem 26: During the reporting period ended 31st March 2016, Ryno Ltd, has sold various financial assets:
(a) Ryno Ltd. sells a financial asset for ` 20,000. It is an unconditional sale i.e. no strings attached to the
sale, and no other rights or obligations are retained by Ryno Ltd.
(b) Ryno Ltd. sells an investment in shares for ` 30,000 but retains a call option to repurchase the shares
at any time at a price equal to their current fair value on the purchase date.
(c) Ryno Ltd. sells a portfolio of short-term account receivables for ` 4,00,000 and promises to pay
up to ` 15,000 to compensate the buyer if and when any defaults occur. Expected credit losses are
significantly less than ` 15,000 and there are no other significant risks.
(d) Ryno Ltd. sells a portfolio of receivables for ` 27,000 but retains the right to service the receivables
for a fixed fee.
(e) Ryno Ltd. sells an investment in shares for ` 40,000 and simultaneously enters into a total return
swap with the buyer under which the buyer will return any increases in value to Ryno Ltd. and Ryno
Ltd. will pay the buyer interest plus compensation for any decreases in the value of the investment.
(f) Ryno Ltd sold a financial asset with a call option which is deep out of the money.
Required: Help Ryno Ltd. by evaluating the extent to which de-recognition is appropriate in each of the
above cases.
Solution:
(a) Ryno Ltd. should derecognized the transferred financial asset, because it has transferred all risks and
rewards of ownership.
(b) Ryno Ltd, should derecognized the transferred financial asset, because it has transferred substantially
all risks and rewards of ownership.
(c) Ryno Ltd. should continue to recognize the transferred receivables because it has retained
substantially all risks and rewards of the receivables. It has kept all expected credit risk, and there
are no other substantive risks.
(d) Ryno Ltd. should derecognized the receivables because it has transferred substantially all risks and
rewards. Ryno Ltd. may have to recognize a servicing asset or servicing liability for the servicing
right.
(e) Ryno Ltd. should continue to recognize the sold investment because it has retained substantially all
the risks and rewards of ownership. The total return swap results in Ryno Ltd. still being exposed to
all increases and decreases in the value of the investment.
(f) Ryno should derecognize the asset.
PROBLEMS ON HEDGING
Problem 27: Hedging:
Aakshaya Ltd. has given a 12.50% fixed rate loan to its subsidiary Shaya Ltd. Aakshaya Ltd. measures this loan
at an amortised cost of `2,50,000. Aakshaya Ltd. has plants to hive off the receivable at a later stage and as
a measure to safeguard against fall in value of its due enters into a pay-fixed, received floating interest rate
swap to convert the fixed interest receipts into floating rate receipts, Aakshaya Ltd. designates the swap as a
hedging instrument in a fair value hedge of the loan asset.
Over the following months, market interest rates increase and Aakshaya Ltd. earn interest income of
`25,000 on the loan and `1,000 as net interest payments on the swap. The fair value of the Loan Asset
decreases by ` 5,000 while that of the interest rate swap increases by `5,000. You are informed that all
conditions required for the Hedge Accounting are satisfied. You are required to pass journal entries, with
suitable narrations, in the books of Aakshaya Ltd. to record the above transactions. (CA Final May 2010 OS)
Solution:
S. No. Particulars Dr. ` Cr. `
(1) Cash A/c Dr 25,000
To Interest A/c 25,000
(Being interest recd on loan asset)
(2) Derivative A/c Dr 5,000
To Hedging gain A/c ….(P/L) 5,000
(Being increase in interest rate swap)
(3) Hedging loss A/c DR ….(P/L) 5,000
To Loan to Shaya A/c 5,000
(Being decrease in fair value of loan)
(4) Cash A/c Dr 1,000
To Interest A/c 1,000
(Being interest settlement on increase in swap)
Problem 28: Fair Value hedge:

Mr Bankim is an exporter of goods. He exported goods worth $ 20,000 on 1/1/2017 on credit basis for a period of
6 months. As he is worried about the changes in exchange rates he took a forward cover. Following are the details:
Date Rate
01/01/2017 1$ = ` 65.50 Spot rate
01/01/2017 1$ = ` 66.00 Forward rate for 6 months
31/03/2017 1$ = ` 65.00 Closing rate
31/03/2017 1$ = ` 65.20 Forward rate for 3 months
30/06/2017 1$ = ` 64.90 Spot rate = FR for 0 maturity
Pass journal entries in the books of Mr Bankim assuming:

(i) He hedges his receivables by taking forward cover.
(ii) He speculates by taking forward (exporter cum speculator).
Solution:
It’s a hedge of Trade receivables i.e. a Fair Value Hedge.
Hedge accounting is adopted:
1/1/2017: Trade receivables Dr 13,10,000 (20000 x 65.50)
To Sales and Services 13,10,000
1/1/2017: No entry for Forward FV=0
31/3/2017: Exchange loss a/c Dr (P/L) 10,000 (65.50-65) 20000
To Trade receivables 10,000
Financial Asset a/c Dr 16,000 (66-65.20) 20000
To Derivative gain (P/L) 16,000
30/6/2017: Exchange loss a/c Dr (P/L) 2,000 (65-64.90) 20000
To Trade receivables 2,000
Financial Asset a/c Dr 6,000 (65.20-64.90) 20000
To Derivative gain (P/L) 6,000
Cash a/c Dr 12,98,000 (20000 x 64.90)
To Trade receivables a/c 12,98,000
Cash a/c Dr 22,000 (20000 + 2000)
To Financial Asset a/c 22,000
Hedge accounting is not adopted:
Still the entries would remain same.
Problem 29: Hedging - FVH
On April 1, 2013, Omega Ltd. borrowed ` 10 lakh at annual fixed interest rate of 7% payable half-yearly.
The life of the loan is 4 years with no pre-payment permitted. The company expected the interest rate to fall
and on the same day, it entered into an interest rate swap arrangement, whereby the company would pay
6-month LIBOR and would receive annual fixed interest of 7% every half-year. The swap effectively converted the
company’s fixed rate obligation to floating rate obligation. The following value of swap and debt are available
Value of swap (` in lakh) Value of debt (` in lakh)
April 1, 2013 + 0.2 10.2
March 31, 2014 – 0.1 9.9
Six-month LIBOR on April 1, 2013 was 6% and that on October 1, 2013 was 8%.
Show important accounting entries in respect of the swap arrangement.

Solution: The interest rate swap is used to hedge fair value of fixed-rate debt. This is a case of fair value
hedge.
In the books of Omega Ltd. (Journal Entries)
Particulars Dr. Cr.
Interest A/c Dr. (10 x 7% × 6/12) 0.35
To Cash A/c 0.35
(Being interest on fund borrowed for first half-year 2013-14)
Loss on valuation of debt A/c Dr. (10.2-10) 0.20
To Loan A/c 0.20
(Being increase in value of debt recognised)
Swap Hedge A/c Dr. 0.20
To Gain on Swap Hedge A/c 0.20
(Being increase in value of swap recognised)
Cash A/c Dr. A/c Dr. (10 – [7%-6%] ) 6/12 0.05
To Interest A/c 0.05
(Being swap settlement received for first half-year 2013-14)
Interest A/c Dr. 10 x 7% x 6/12 0.35
To Cash A/c 0.35
(Being interest on fund borrowed for second half-year 2013-14)
Loan A/c Dr. 10.2 – 9.9 0.30
To Gain on valuation of debt 0.30
(Being decrease in value of debt recognised)
Loss on Swap Hedge A/c Dr. 0.2 – (-0.1) 0.30
To Swap Hedge A/c 0.30
(Being cumulative loss on swap recognised)
Interest A/c Dr. (10 [8% - 7% ) 6/12 0.05
To Cash A/c 0.05
(Being swap settlement paid for second half-year 2013-14)
Problem 30: Cash flow hedge- Forecasted sale

Kriplani Works is a producer of steel plates used in auto sector. To hedge the risk of decline in the price of 100
units that it expects to sell on December 31, 2015, Kriplani on January 1, 2014, enters into a forward contract
on 100 units for delivery on December 31, 2015. During 2014, the change in the fair value of the forward
contract is a decrease of Rs 8,00,000. During 2015, the change in the fair value of the forward contract is an
increase of Rs 2,00,000. On December 31, 2015, Kriplani Works settles the forward contract by paying Rs
6,00,000. At the same time, it sells 100 steel plates to customers for Rs 93,00,000.
Required
Prepare the appropriate journal entries in the year 2014 and 2015. Assume that all conditions for hedge
accounting are met and that the hedging relationship is fully effective (100%).
Solution
January 1, 2014
No entry required.
December 31, 2014
Dr Hedging Reserve 8,00,000………transferred through OCI
Cr Derivative liability 8,00,000
(To record the decrease in fair value of the hedging instrument)

December 31, 2015
Dr Derivative liability 2,00,000
Cr Hedging Reserve 2,00,000
(To record the increase in fair value of the hedging instrument)
Dr Derivative liability 6,00,000
Cr Cash 6,00,000
(To record the settlement of the hedging instrument)
Dr Cash 93,00,000
Cr Hedging Reserve 6,00,000 (releasing equity in revenue a/c.)
Cr Sales revenue 87,00,000
(To record the sale and the associated amount deferred in equity related to the hedge of the sale)
Problem 31: FVH
Samta Ltd has investments in equity shares of Jalpa Ltd @3,00,000 classified as FVTPL.
S Ltd expects a decline in the value of investments and hence enter into a put option to sell the shares for `
3,00,000. If the fair value of the shares falls to ` 2,85,000 and value of option to be ` 15,000 assuming perfect
hedge, account the above transactions considering hedging and state whether it is FVH or CFH. What would
be your answer if hedge accounting is not adopted by S Ltd?
Solution: It is a FVH as put option is entered to protect from the value of investments (asset)
Accounting if hedge a/c is adopted:
P/L Dr 15,000
To Investments in J Ltd 15,000
Derivative asset Dr 15,000
To P/L 15,000
Accounting if hedge a/c is not adopted:
Equity Dr 15,000 (As per AS-30 changes in FA à is retained in equity)

To Investments in J Ltd 15,000
Derivative asset Dr 15,000
To P/L 15,000
Problem 32: Fair Value Hedge
Kanan Ltd has a long position in Asian Paints for 2,70,000 equity shares of Rs 120. Equity shares designated
as FVTOCI. To hedge the spot position Kanan Ltd wants to take appropriate position in Nifty Futures. Beta of
Asian Paints is 1.60 with Nifty. Lot size = 200 units. Other details are given below:
Asian Paints Nifty Spot Nifty futures
1/2/2016 120 8000 8100
31/3/2016 115 7954 7850
31/3/2017 103 7421 7321
Answer the following:
Nature of hedge?, Hedging item?, Hedging instrument?, Position in Nifty?, Pass journals for hedging?
What will be your answer if no hedge accounting is preferred.
Solution:
Fair Value hedge: Nifty is taken for protecting spot position of Asian Paints.
Hedge item: Shares of Asian Paints

Hedging instrument: Nifty futures.
Position in Nifty: For protecting the long position in spot we have to take a short position in Nifty.
Calculation of Number of contracts = LHS = RHS
Number of shares x MP x Beta = No of contracts in Nifty x lot size x Nifty future
270000 x 120 x 1.50 = Nos x 200 x 8100
No of contracts = 30 sell contracts.
As it is a FVH on equity instrument designated as FVTOCI the gain / loss on re- estimation of hedging
instrument is transferred to OCI.
1/2/2016:
31/3/2016: OCIDr 1350000
To Investments in shares 1350000
Nifty Futures Asset Dr 1500000
To OCI 1500000
31/3/2017: OCI Dr 3240000
To OCI 3174000
If Hedging is not adopted:
Investments will be recorded as per FVTOCI (as mentioned)
Nifty futures will be FVTPL
1/2/2016:
31/3/2016: OCI Dr 1350000
To P/L 1500000
31/3/2017: OCI Dr 3240000
To P/L 3174000
Problem 33 : Cash flow Hedge
Chabbi Ltd has the INR as its reporting currency. On 30 June 2017, it enters into a forward contract to receive
Foreign Currency (FC) 100000 and deliver INR 109600 on 30 June 2018. It designates the Fx Contract as a
hedging instrument in a cash flow hedge of a firm commitment to purchase a certain quantity of Paper on 30
June 2018. All hedge accounting conditions are met. 31 March is the year ending.
Date Spot rate FR to 30/6/2018

30 June 2017 1.092 1.096
31 December 2017 1.086 1.092
31 March 2018 1.075 1.081
30 June 2018 1.050 -
The interest rates prevailing in the local currency is 6% per year.
Pass journal entries for Chabbi Ltd.
Solution:
It’s a case of Firm commitment in FC, hence Cash flow hedge.
Hedging instrument: Forward Contract
Hedging item: Firm Commitment in FC.
Date Spot Forward Spot Valn Forward

Valn.
30 June 2017 109200 109600 - -
31 December 2017 108600 109200 +600 (400)
31 March 2018 107500 108600 +1700 (1500)
30 June 2018 105000 105000 +4200 (4600)

Journal Entries:
30/6/2017: Spot position - No Entry
Forward position – No Entry.
31/12/2017: Spot position - No Entry: Notional gain = 583 (600 / 1.03)
Cash flow Reserve a/c Dr 388 -400 x 1/(1.03)
To Financial liability 388
(Change in FV of derivative)
31/03/2018: Spot position - No Entry: Notional gain = 1084 (1700-600) x 1.015)
Cash flow Reserve a/c Dr 1084 -1100 x 1/(1.015)
To Financial liability 1084
(Change in FV of derivative)
30/06/2018: Cash flow Reserve a/c Dr 2728
Profit / loss a/c Dr 400 (4600-4200)
To Financial liability 3128 (4600 – 1084 – 388)
(Change in FV of derivative and excess hedge transferred to P/L)
Financial liability a/c Dr 4600
To Cash a/c 4600
Purchase of paper a/c Dr 105000
To Cash 105000
P/L Extract
Sales XXX
Purchases 105000
Less: Cash flow Reserve (4200) 100800
Other expense
Forex hedging loss 400
Case Study on Fair Value Hedge

On January 1, 2015, GT purchases a five-year bond that has a principal amount of $100,000 and pays annually
fixed interest rate of 5% per year (i.e., $5,000 per year). GT classifies the bond as an available-for-sale financial
asset. Current market interest rates for similar five-year bonds are also 5% such that the fair value of the bond
and the carrying amount of the bond on the acquisition date is equal to its principal amount of $100,000.
Because the interest rate is fixed, GT is exposed to the risk of declines in fair value of the bond. If market
interest rates increase above 5%, for example, the fair value of the bond will decrease below $100,000. This
is because the bond would pay a lower fixed interest rate than equivalent alternative investments available
in the market (i.e., the present value of the principal and interest cash flows discounted using market interest
rates would be less than the principal amount of the bond). To eliminate the risk of declines in fair value due
to increases in market interest rates, GT enters into a derivative to hedge (offset) this risk. More specifically,
on January 1, 2015, Entity A enters into an interest rate swap to exchange the fixed interest rate payments
it receives on the bond for floating interest rate payments. If the derivative hedging instrument is effective,
any declines in the fair value of the bond should offset by opposite increases in the fair value of the derivative
instrument. GT designates and documents the swap as a hedging instrument of the bond. On entering into the
swap on January 1, 2015, the swap has a net fair value of zero. (In practice, swaps usually are entered into at a
zero fair value). Therefore, no journal entry is required on this date. At the end of 2015, the bond has accrued
interest of $5,000.
GT makes this journal entry:
Interest receivable Dr 5,000
To Interest income 5,000
In addition, market interest rates have increased to 6%, such that the fair value of the bond has decreased
to $96,535. Because the bond is classified as available for sale, the decrease in fair value would normally have
been recorded directly in equity rather than in profit or loss. However, since the bond is classified as a hedged
item in a fair value hedge of the exposure to interest rate risk, this change in fair value of the bond is instead
recognized in profit or loss:
Hedging loss (hedged item) 3,465
To Available-for-sale financial asset 3,465
At the same time, GT determines that the fair value of the swap has increased by $3,465 to $3,465. Since
the swap is a derivative, it is measured at fair value with changes in fair value recognized in profit or loss.
Therefore, GT makes this journal entry:
Swap asset Dr 3,465
To Hedging gain (hedging instrument) 3,465
Since the changes in fair value of the hedged item and the hedging instrument exactly offset, the hedge is
100% effective, and the net effect on profit or loss is zero.
Case Study on Cash Flow Hedge

At the beginning of 2010, Berry Ltd. issues a 10-year liability with a principal amount of $100,000 for
$100,000 (i.e., at par). The bond pays floating interest that resets each year as market interest rates change.
Entity A measures the liability at amortized cost ($100,000). Because the interest rate regularly resets to
market interest rates, the fair value of the liability remains approximately constant irrespective of how market
interest rates change. However, Berry wishes to convert the floating rate payments to fixed rate payments in
order to hedge its exposure to changes in cash flows due to changes in market interest rates over the life of
the liability.
To hedge the exposure, Berry enters into a five-year interest rate swap under which the entity pays
fixed rate payments (5%) and in return receives floating rate payments that exactly offset the floating rate
payments it makes on the liability. Entity B designates and documents the swap as a cash flow hedge of its
exposure to variable interest payments on the bond. On entering into the interest rate swap, it has a fair value
of zero. The effect of that interest rate swap is to offset the exposure to changes in interest cash flows to be
paid on the liability. In effect, the interest rate swap converts the liability’s floating rate payments into fixed
rate payments, thereby eliminating the entity’s exposure to changes in cash flows attributable to changes in
interest rates resulting from the liability.
At the end of 2015, the bond has accrued interest of $6,000. Berry Ltd makes this journal entry:
Interest expense Dr 6,000

To Bond interest payable 6,000
At the same time, a net interest payment of $1,000 has accrued under the swap for the year. Therefore;:
Swap interest receivable 1,000
To Interest expense 1,000
The net effect on profit or loss is fixed net interest expense of $5,000 (= 6,000 – 1,000). Because the swap
is a derivative, it is measured at fair value. Berry Ltd determines that the fair value of the swap (excluding
accrued interest) has increased by $5,200. As the swap is designated as a hedging instrument in a cash flow
hedge, the change in fair value is not recognized in profit or loss but as a separate component of equity to the
extent the swap is effective. In this case, Entity A determines that the swap is 100% effective.
Journal entry:
Swap asset Dr 5,200
To Equity (hedging reserve) 5,200
Because the fair value of the swap will converge to zero by its maturity, the hedging reserve for the swap
will also converge to zero by its maturity to the extent the hedge remains in place and is effective.
Problem 44:A Company enters into a fixed price forward contract to purchase one million kilograms
requirements. The of copper in accordance with its expected usage contract permits the company to take
physical delivery of the copper at the end of 12 ‘months or to payor receive a net settlement ‘in cash, based
on the change in fair· value’ of copper. Is the contract accounted for as a derivative? Explain
Answer: First lets prove that it is derivative instrument:
Condition 1: The contract should derive its value from Underlying Asset:
(a) Yes. Metal Prices are the underlying Asset
(b) Requires negligible Investment Yes. Only a Contract is entered.
(c) Can be settled on Net basis Yes. (Given)
(d) Volatility in underlying asset Metal Prices are subject to fluctuation
Condition 1: The contract should derive its value from an Yes. Metal Prices are the underlying Asset
underlying asset:
Condition 2: Either low investment or low investments Here No Investments.
Condition 3: Settled on a later date Will be settled after 12 months.
Yes it is a Derivative Contract as all conditions are satisfied.
Now let’s see whether it is a Financial Instrument:

If the contract is settled on Gross Delivery basis then it is not financial instrument but an Executory
Contract.
But if the contract is settled on net cash basis or delivery of goods will be immediately sold at a profit
further to another party then it is a financial instrument.
SOLVED QUESTION PAPER CA FINAL-MAY 2016
(ACCOUNTING STANDARDS)
AUDIT
Question 2(a): ENP Ltd engaged an actuary to ascertain its employee cost, gratuity and leave encashment
liabilities. As an auditor of ENP Ltd you would like to use the report of the actuary as an audit evidence. How
would you evaluate the work of an actuary. (Marks 4)
Solution: It is a case of work of an expert. As per AS-15 (Rev) every entity is required to compute its retirement
benefit for each year of service rendered by the employees. The certification is done by a qualified actuary. If
the actuary is a qualified actuary and quite experienced in the field then the report can be used as an audit
evidence.
Question 4 (d): B Pvt Ltd started stock broking business at a cost of ₹ 150 lakhs. The same is recorded
under the head fixed assets. The company did not write off any amount since the rights would enable the
company to carry the business in perpetuity. As a statutory auditor comment ? (Marks 4)
Solution: Under AS – 26 every Intangible Asset has a finite life. But if any IA has an infinite life then it has to
be amortised for a maximum period of 10 years. The company in the present case has not yet amortised the
IA (Stock Membership Card). The auditor should modify the auditor Report for non – compliance of AS-26.
Question 6(a): K Ltd changed its employee remuneration policy from 1/4/2015 to provide for PF on leave
encashment also. The leave encashment policy provides that employees can either utilize or encash it. As on
31/3/2016 the company obtained the actuarial valuation for leave encashment. However, it did not provide
for 12% PF contribution on it. The auditor insists on providing PF on leave encashment but the management
replied that it will be provided only on the date when leave encashment will be availed. Many times leave
encashment is not utilized. Comment (Marks 4)
Solution: All the retirement benefits like gratuity, pension etc should be recorded on accrued basis. The
rendering of services by the employees is the point of accrual. PF cannot be provided on Cash basis i.e. Pay
as you go basis. The company has to make a proper valuation as per AS – 15 (Rev) for the provision of PF on
leave encashment otherwise the audit report needs to be modified.
Question 7(a) Deferred Taxation: (Marks 4)
Deferred Taxes: Deferred taxes are taxes on timing differences. Deferred taxes indicate either taxes payable
in future or tax savings in future. If today more taxes have been paid against tax expense, this mean for future
we have created a Deferred tax Asset (DTA). If today less taxes have been paid against tax expense, then a
liability is accrued which is Deferred tax Liability (DTL).
Deferred Taxes = Tax rate% x Timing Differences
Measurement of Deferred Taxes: For the measurement of D.T. let’s say Depreciation as per I. Tax is ` 1,00,000
and Depreciation as per Companies Act is ` 70,000. Tax rate is 30%.
Then T.D = ` 30,000 and D. T. = 30% x 30,000 = ` 9,000 (DTL)à pay less today and tax authority will recover
it in subsequent year.
Other important points:
◘◘ DTA indicates assets created for the company.
◘◘ DTL indicates liability created for the company.
Solved Question Paper—CA Final-May 2016 (Accounting Standards) 145
◘◘ Separate DTA’s / DTL’s are calculated for each timing difference.

◘◘ Once a DTA / DTL is created it should be reversed in the subsequent in years.
◘◘ Deferred taxes are created for all timing differences. Deferred taxes are not created for permanent
differences.
◘◘ Deferred taxes also arise in case of companies paying Nil taxes.
◘◘ Deferred taxes should not be discounted.
◘◘ Deferred taxes should be created for all timing differences. But for DTA the principle of prudence
should also be taken care of.
P roblem 13: Z Ltd changed its employee remuneration policy from 1st April 2012, to provide for 12%
Contribution to Provident Fund on Leave Encashment also. As per the Leave Encashment Policy, the
Employees can either utilize or encash it. As at 31st March 2013 the Company obtained an actuarial valuation
for the Leave Encashment Liability. However, it did not provide for 12% PF Contribution on it. The Auditor of the
Company wants it to be provided, but the Management replied that as and when the employees availed leave
encashment, the Provident Fund Contribution was made. The Company further contends that this is the correct
treatment, as it is not sure whether the employees will avail leave encashment or utilize it. (5 Marks)
Solution: The company must provide the 12% PF on leave encashment. As per AS-15 (Rev) any retirement
benefits payable in future is required to be provided on accrual baiss as and when the employees render the
services. Pay – as – you – go theory is abolished i.e. not to record the empoyees cost when they are paid. As
the company is not following AS-15 (Rev) the audit reports are required to be qualified.
FINANCIAL REPORTING
Question 1(a): AS–16 (5 Marks)
Harish Construction Ltd is constructing a huge Building Project consisting of four phases. It is expected that
the full building will be constructed over several years but Phase I and Phase II of the Building will be started
as soon as they are completed. Following is the detail of the work done on different Phases of the building
during the Current Year: (₹ Lakhs)
Particulars PhaseI I Phase II Phase III Phase IV
Cash Expenditure 10 30 25 30
Building Purchased 24 34 30 38
Total Expenditure 34 64 55 68
Total Expenditure of all Phases 221
Loan taken @ 15% at the Beginning of the Year 200
During the current year, Phase I and Phase II have become operational. Find out the total amount to be
capitalized and to be expensed during the year.
Solution:
Particulars `
1. Interest Expense on Loan = ` 2,00,00,000 at 15% 30,00,000
2. Total Cost of Phases I and II (` 34,00,000 + ` 64,00,000)……phase completed 98,00,000
3. Total Cost of Phases III and IV (` 55,00,000 + ` 68,00,000)………..WIP 1,23,00,000
4. Total Cost of all 4 Phases 2,21,00,000
5. Interest to be capitalized = (1,23,00,000/ 2,21,00,000) x 30 lakhs 16,69,683
6. Interest charged to P/L (Step1-5) 13,30,317
Question 1(c): AS–2 (5 Marks)

The following information on Zenith Ltd is given below. You are required to:
(1) Calculate the value of Raw Materials and Finished Goods at Cost.
(2) Calculate the Value of Closing Stock, when Net Realizable Value of Finished Goods B is
(a) ₹ 800, or (b) ₹ 600.
Raw Material A (Closing Balance =\ 1000 Units) Finished Goods B (Closing Balance =\ 2400 Units)
Particulars ` per Unit Particulars ` per Unit
Cost Price including Excise Duty 400 Raw Materials Consumed 440
Excise Duty (CENVAT is receivable on Excise 20 Direct Labour 120
Duty paid) Direct Overhead 80
Freight Inward 40 Total Fixed Overhead for the year

Unloading Charges 20 on normal capacity of 20,000 units
Replacement Cost 300 ` 4 Lakhs
Raw Material A is used for production of Finished Goods B.

Solution:
Computation of Cost
Cost of Raw Material ` Cost of Finished Goods `
Cost including Excise Duty 400 Raw Material 440
Less: Excise Duty(CENVAT Receivable)
Add: Freight Inward (20) Direct Labour 120
Add: Unloading Charges
40 Direct Overhead 80
20 Fixed Production Overheads 20
Cost p.u. of Raw Material 440 Cost p.u. of Finished Goods 660
Valuation Principle
Valuation Principle for Finished Goods Cost or Net Realisable Value whichever is lower.
Valuation Principle for Raw Materials If the Finished Goods in which the Raw Material is
incorporated are expected to be sold below Cost as well as
Historical cost fall below Replacement Cost → Value RM at
Replacement cost.
Valuation of Closing Stock

If NRV of B = ` 800 ` If NRV of B = ` 600 `
Raw Materials = ` 440 × 1,000 Units 4,40,000 Raw Materials = 300 × 1,000 Units 3,00,000
Finished Goods = ` 660 × 2,400 Units 15,84,000 Finished Goods = ` 600 × 2,400 Units 14,40,000
Question 4 (b): Loan Default / Rescheduling (4 Marks)

A Company borrowed a sum of ₹ 85 Lakhs for its expansion. The terms of loan were as follows:
(a) Tenure of the loan will be 10 years.
(b) Interest is payable @ 12% p.a. and the principal is repayable at the end of 10th year.
The Company defaulted in the payment of interest for the year 4 , 5 and 6. A Loan Reschedule Agreement took
place at the end of 7th year. As per the agreement, the Company is required to pay ₹ 150 Lakhs at the end of
8th year. You are required to calculate the additional amount to be paid on account of rescheduling and also
the Book Value of the Loan at the end of 8th year when reschedule took place assuming that interest will be
compounded in case of default.
Solution:
Particulars Computation `
Loan Amount 85,00,000
Period of default 4 to 8 Years 5 Years

Book Value at the end of 8th Year 85,00,000×(1.12)5 1,49,79,904
Rescheduled amt. to be paid at the end of 8th Year 1,50,00,000

Additional amt. to be paid on Rescheduling 20,096
Question 4 (c): AS-9 – Sale & Re–Purchase (4 Marks)

AXE Limited is facing a Financial crunch and entered into a Contract with BXE Limited for sale of goods for
₹ 25 Lakhs at a Profit of 20% cost on 1st January 2015. On the same day, BXE Ltd entered into an agreement
with AXE Limited to resale the same goods at ₹ 31.50 Lakhs on 1st July 2015. You are required to state the
treatment of this transaction in the Financial Statements of AXE Limited assuming that pre–determined re–
selling price covers the holding cost of BXE Limited. Also pass necessary journal entries in the books of AXE
Limited if AXE Limited closes their books of accounts on 31st March 2015.
Solution: It is asumed that ₹ 25 Lakhs is Cost of Goods, Hence, Sale Value = 25 + 20% = ₹ 30 Lakhs
1. It is a case of Sale and Repurchase transaction.
2. The entire Cash Inflow of ₹ 30,00,000 is not revenue as defined in AS – 9 but is a financing activity.
The accounting of transactions in the books of AXE Ltd (Seller) for the year ended 31st March, are
given below –
Dr. Cr.
Date Particulars
` `
1st Jan. Bank A/c 30,00,000
To Advance from BXE Ltd A/c 30,00,000
(Being amount received from BXE Ltd as per Sale & Re–
purchase Agreement)
31st Mar. Finance Costs A/c 75,000
To Advance from BXE Ltd A/c 75,000
(Being Finance Costs accrued)
Question 5 (b): Provision for Option (4 Marks)

Abhay furnishes the following information about all “Options” at the Balance Sheet date as on 31.03.2016.
Determine the Total Amount of Provisions to be made in his books of account.
Securities A B C A B C
Details of Options Bought Details of Options Sold
Premium paid 35,000 15,000 20,000 Premium recd. 20,000 30,000 20,000
Premium prevailing on B/S 30,000 5,000 8,000 Premium prevailing on B/S 25,000 20,000 15,000
date date
Solution:
Summarised statement for premium paid on Options bought:
Provision for A = 35,000 – 30,000 = ₹ 5,000 loss
Provision for B = 15,000 – 5,000 = ₹ 10,000 loss
Provision for C = 20,000 – 8,000 = ₹ 12,000 loss
Total provision on Options bought = ₹ 27,000 loss
Summarised statement for premium paid on Options sold:
Provision for A = 20,000 – 25,000 = ₹ 5,000 loss
Provision for B = 30,000 – 20,000 = ₹ 10,000 gain
Provision for C = 20,000 – 15,000 = ₹ 5,000 gain
Total provision on Options bought = ₹ Nil gain
Question 7 (b): Financial Instruments – Classification (4 Marks)
In following situations evaluate whether the preference shares are an Equity Instrument / Financial
Liability to the Issuer Entity.
Solution:
Situation E / FL Reason
1. A Company has issued 6% It is a Financial The entity is required to settle the amount is cash. The entity
mandatorily Red. Pref. Sh. with Liability has an obligation to settle.
mandatory Fixed Dividends.
2. A Company issued Non– Equity Since Dividends are payable only if Dividend on Ordinary
Red. Pref. Sh. with Dividend Instrument Shares are paid, it contains no contractual obligation to pay
payments linked to ordinary Dividends & Principal. It is similar to ordinary shares.
shares.
3. If the Dividend Payments are Financial Cumulative dividends means some accumulated dividends
cumulative, in the above case (2) liability will be paid on a later date. At present the company does not
have enough profits. But once the company earns sufficient
profits, it shall pay the cumulative dividends.
Question 7 (c): Accounting for CENVAT / Excise Duty (4 Marks)

Dark Ltd purchased a Plant for ₹ 100 Lakhs (excluding Excise Duty of ₹ 10 Lakhs) from Mark Ltd during
2015–2016 and installed immediately. During 2015–2016, the Company produced excisable goods on which
the Excise Authority charged Excise Duty to the extent of ₹ 9.00 Lakhs. Show the necessary Journal Entries
explaining the treatment of CENVAT Credit in the books of Dark Ltd. You are also required to indicate the
value of Plant at which it should be recorded in Fixed Asset Register.
Solution:
Particulars Debit ` Credit ₹
Plant A/c 90,00,000
CENVAT Credit Deferred (Capital Goods) A/c Dr. 10,00,000
To Bank / Vendor payable
(Being machinery purchased & input tax thereon paid) 1,00,00,000
CENVAT Credit Receivable (Capital Goods) A/c Dr. 5,00,000
To CENVAT Credit Deferred (Cap. Goods) A/c 5,00,000
(Being CENVAT Credit available on Capital Goods for the current period i.e. →
10,00,000×50%=→ 5,00,000)
Excise Duty Payable A/c Dr. 9,00,000

To CENVAT Credit Receivable (Cap. Goods) A/c 5,00,000
To Bank A/c 4,00,000
(Being set–off of CENVAT Credit against ED liability and balance paid by cash)
Question 7 (d): Ind AS–8 – Change in Method of Depreciation (4 Marks)

A Machine was required in 01.04.2012 at a cost of ₹ 7,50,000. The expected working life to the machine is 10
years and it is expected to realize ₹ 75,000 at that time. The Company charged depreciation on straight line at
₹ 67,500 per year up to 2014–2015. From 2015–2016 the Company switched to Reducing Balance Method
of Depreciation @ 15% p.a. in respect of the Machine. The revised Useful Life of Machine is 15 years. The new
rate shall apply with retrospective effect from 01.04.2014.
How would you deal with the above in the annual accounts of the Company for the ended 31.03.2016, in the
light of Ind AS–8?
Solution:
As per Ind AS – 8 a change in Depreciation method is change in Accounting Estimate and not Accounting
Policy. It also indicates that the company has to go for prospective effect.
Calculation of Depreciation from 1/4/2012 till 31/3/2014.
Cost of the asset 7, 50 ,000
Less: Depreciation for 2 years 67500 x 2 (1 ,35, 000)
WDV as on 1/4/2014 6,15,000
Depreciation for the current year 2014-2015 = 615000 x 15% (WDV) = ₹ 92,250
We have to ignore the previous period Depreciation as we are going for a prospective effct.
Question 7(e): Schedule III – Recognition of Income (4 Marks)
C Ltd is a Group engaged in manufacture and sale of industrial and FMCG products. One of their division also
deals in Leasing of Properties – Mobile Towers. The Accountant showed the Rent arising from the leasing of
such properties as Other Income in the Statement of Profit and Loss. Comment whether the classification of
the Rent Income made by the Accountant is correct or not in the light of Schedule III to the Companies Act,
2013.
Solution: Schedule III: Sale of industrial and FMCG products comes under main head “Sales and Services”. As
per the question, one of their Divisions also deals in Leasing of Properties. The resources are used continuously
to earn income. Hence, the Lease Rentals constitute the major income of the New Property Division and
does not constitute “Other Income”. It should be shown as “Revenue from Operations” in accordance with
Revised Schedule III. Other income is not proper head for Rentals income earned every year.
Composition of Marks for May 2016:
Financial Reporting paper
Accounting Standard Marks Audit paper

AS-16 5 Accounting Standard Marks
AS-2 5 AS-26 4
Ind AS – 109 12 (4+4+4) AS-15 8 (4+4)
AS-10 4 AS-22 4 = 16
AS-9 4 Total marks = 38+16 = 54
Ind AS-8 4
Schedule III 4 = 38

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AN INTRODUCTION TO IND AS

ABBREVIATION STANDS FOR NOS WHO ISSUED

FRIENDS EVEN GO THROUGH THE FOLLOWING SIMPLIFIED NOTES

Explain Net Worth?

Calls in Arrears ` 50 lakhs

VERY IMPORTANT AND MAJOR CARVE OUTS

BREACH RECTIFIED AFTER THE BALANCE SHEET DATE (EVENTS OCCURRING)

EMPLOYEE BENEFITS – DISCOUNT RATE:

BUSINESS ACQUISITIONS – GAIN ON BARGAIN PURCHASE:

FOREIGN CURRENCY CONVERTIBLE BONDS:

FOREIGN EXCHANGE FLUCTUATION

IFRS 101 + IAS 21: No provision in IFRS.

AMORTIZATION OF TOLL ROADS:

INVESTMENTS IN ASSOCIATES AND JV (DIFFERENT ACCOUNTING POLICIES):

OTHER / MISCELLANEOUS CARVE OUTS

DIFFERENCES BETWEEN IND AS-7 AND IAS-7

DIFFERENCES BETWEEN IND AS-19 AND IAS-19

Differences between Ind AS-20 and IAS-20

DIFFERENCES BETWEEN IND AS-21 AND IAS-21

DIFFERENCES BETWEEN IND AS-24 AND IAS-24

DIFFERENCES BETWEEN IND AS-33 AND IAS-33

DIFFERENCES IND AS 23, IAS 23

DIFFERENCES IND AS 27, IAS 27

RECONCILIATION OF ACCOUNTING STANDARDS

Financial Statements – Purpose

Balance Sheet (Includes SOCE)

Statement of Cash Flow

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

True and Fair View

Explicit and Unreserved Statement

yy Should have comparatives with all yy When

yy When the entity changes the yy Disclosures when reclassification made:

Identification features of Financial Statements

Classification of Current Assets (same definition is given by Schedule III)

Classification of Current Liabilities (same definition is given by Schedule III)

All other liabilities are non-current liabilities.

Items to be segregated in Balance Sheet or Notes

Disclosures for Share Capital & Reserves

Examle: For each class of share capital:

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

P&L Non-Controlling Int.

Statement of P & L Other Comprehensive Income Controlling Int.

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

Other Comprehensive Income (OCI)

Few instances of OCI

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

Statement of Changes in Equity

Notes to Financial Statements

Disclosure of Significant accounting policies (Same as AS-1)

Comparison of Ind AS-1 with IAS -1

AS – FORMAT OF FINANCIAL STATEMENT

4) Dividend declared 12% (not yet accounted).

Share of Non - Controlling Interest is not applicable.

Balance Sheet as on 31/3/2015

Total (E+L) = 665.14

Fixed Assets 534.72 (445.60+20% of 445.60)

Current Assets 130.42

Format of Financial Statement for the year

Equity Retained Securities OCI – OCI Total

Changes in equity current year

Some important points on Ind AS-2

(2) Recognition of Expense

Explanation with illustration