Final Course

Financial Reporting
Final Course
(Revised Scheme of
Education and Training)

ISBN : 978-81-8441-897-2
Paper: 1

Financial
Reporting

Module - 1
Board of Studies
The Institute of Chartered Accountants of India
A- 29, ICAI Bhawan, Sector-62, Noida-201309
Phone : 0120 - 3045930 The Institute of Chartered Accountants of India
E-mail : bosnoida@icai.in (Set up by an Act of Parliament)
November/2018/P2372 (Revised)
Website : http://www.icai.org
New Delhi
INDEX
Page No. Edition of Students’ Journal Topics
1-6 May 2019 Ind AS 1
6-8 May 2019 Ind AS 34
9-12 May 2019 Ind AS 7
13-14 May 2019 Ind AS 8
14-16 May 2019 Ind AS 10
17-23 May 2019 Ind AS 115
24-25 August 2019 Ind AS 20
26-29 August 2019 Ind AS 105
30-32 August 2019 Ind AS 41
33-36 August 2019 Ind AS 24
37-42 August 2019 Ind AS 33
FINANCIAL REPORTING
Final new course Paper 1- Financial Reporting: A Capsule for Quick Revision
In a pursuit to provide quality academic inputs to the students to help them in grasping the intricate aspects of the subject,
the Board of Studies brings forth a crisp and concise capsule on Final new course Paper 1 : Financial Reporting.
The syllabus of this paper largely covers almost all Indian Accounting Standards. However, in this capsule we have
focussed on ‘Ind AS covered in Module 2 of November, 2018 edition of the study material except Ind AS 20, Ind AS 113 and
Ind AS 101’. Significant provisions of these Ind AS have been presented through pictorial/tabular presentations for better
understanding and quick revision.
Many of the standards contain certain exceptions. All the exceptions are not necessarily reflected in the charts/
pictorial/table given in the capsule. Hence, students are advised to refer the study material or bare text of these Ind AS
for comprehensive study and revision. Under no circumstances, this capsule substitute the detailed study of the material
provided by the Board of Studies.
Further, students are advised to enhance their ability to address the issues and solve the problems based on Ind AS by
working out the examples, illustrations and questions given in the study material, revision test papers and mock test papers.

Indian Accounting Standard (Ind AS) 1 : Presentation of Financial Statements

Objective

Ind AS 1 sets out

Ind AS 1 prescribes the basis for
presentation of general purpose financial
statements to ensure comparability

Overall requirements Guidelines Minimum requirements

With the entity’s financial With the financial statements For the presentation
of financial For their
statements of previous of other entities. structure For their content
periods. statements

Scope

Applicability Non-applicability

Ind AS 1 is applied in preparing and Ind AS 1 does not apply to the structure
presenting general purpose financial and content of condensed interim financial
statements in accordance with Ind AS statements prepared in accordance
with Ind AS 34 (except paras 15-35).

To all entities
Ind AS 1 uses terminology Entities whose share capital is
suitable for profit-oriented not equity may need to adapt the
entities including public financial statement presentation
sector business entities. of members’ interests.

Presenting Presenting
consolidated separate financial
financial statements in
statements in accordance with
accordance with Therefore, entities with not-
Ind AS 27. for-profit activities may apply
Ind AS 110.
this Standard, by amending
the descriptions used for
financial statements themselves

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 FINANCIAL REPORTING
Complete set of financial statements

includes

A balance sheet A statement of A statement of A statement of Notes, comprising significant

profit and loss changes in equity cash flows accounting policies and other
explanatory information

As at the end of Comparative information

For the period
the period
Of the preceding period
(comparative information
for all amounts reported
in the current period’s
financial statements)
Of the preceding period
for narrative and descriptive
(comparative information
for all amounts reported information shall be given if it
in the current period’s is relevant for understanding
financial statements) the current period’s financial
statements
At the beginning of the preceding period when
• An entity applies an accounting policy retrospectively; or
• An entity makes a retrospective restatement of items in its financial statements; or
• An entity reclassifies items in its financial statements.

Note:
1. An entity shall present a single statement of profit and loss, with profit or loss and other comprehensive income (OCI)
presented in two sections. The sections shall be presented together, with the profit or loss section presented first followed
directly by the other comprehensive income section.
2. Reports and statements presented outside financial statements are outside the scope of Ind AS.
3. An entity is not required to present the related notes to the opening balance sheet as at the beginning of the preceding period.

General features

Presentation of Going Accrual basis of Materiality and Frequency of

True and Fair View Offsetting
concern accounting aggregation reporting
and compliance
with Ind ASs

Consistency of Comparative
presentation information

Change in accounting policy, retrospective Additional comparative Minimum comparative

restatement or reclassification information information

Note: The above general features have been summarised below.

Presentation of True and Fair View and compliance with Ind ASs

Of the financial position Of the financial performance Of the cash flows of an entity

Presentation of a true and fair view requires an entity

To select and apply accounting To present information, in a To provide additional disclosures,

policies as per Ind AS 8. manner that provides relevant, if required, to enable users
reliable, comparable and to understand the impact of
understandable information. particular item.

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FINANCIAL REPORTING
When an entity departs from a requirement of an Ind AS (in extremely rare circumstances), it shall disclose
Management’s conclusion Management’s compliance
that the financial with applicable Ind ASs,
statements present a true except departure from a
and fair view. particular requirement to
present a true and fair view.
Note:
1. An entity shall make an explicit and unreserved statement of compliance of ALL Ind AS in the notes.
2. An entity shall not describe financial statements as complying with Ind ASs unless they comply with all the requirements of Ind ASs.
3. An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or
explanatory material.
Going m An entity shall prepare financial statements
concern on a going concern basis unless management
 intends to liquidate the entity or
 to cease trading, or
 has no realistic alternative but to do so.
m When management has significant doubt
upon the entity’s ability to continue as a
going concern, the entity shall disclose
 the basis on which it prepared the
financial statements and
 the reason why the entity is not regarded
as a going concern.
To assess going concern basis, management may
need to consider a wide range of factors like
m current and expected profitability,
m debt repayment schedules and
m potential sources of replacement financing.
Accrual basis m An entity shall prepare its financial
of accounting statements, except for cash flow information,
using the accrual basis of accounting.
m When the accrual basis of accounting is
used, an entity recognises items as assets,
liabilities, equity, income and expenses.
Materiality m Present separately each material class of
and similar items.
aggregation m Present separately items of a dissimilar
nature or function only if it is material or
required by law (even if it is immaterial).
m If a line item is not individually material, it is
aggregated with other items either in those
statements or in the notes.
m Do not reduce the understandability of its
financial statements by
 obscuring material information with
immaterial information; or
 aggregating material items that have
different natures or functions.
Offsetting Offsetting of assets and liabilities or income and
expenses is not allowed unless required or permitted
by an Ind AS or except when offsetting reflects the
substance of the transaction or other event.
Frequency of An entity shall present a complete set of financial
reporting statements (including comparative information)
at least annually.
Comparative Refer chart 3 of Ind AS 1 for minimum and
information additional comparative information.
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• The title of the Ind AS For each period presented,
departed the financial effect of the
• The nature of the departure on each item in
departure the financial statements.
• The treatment that the
Ind AS would require
• The reason why that
treatment would be so
misleading; and
• The treatment adopted.
Change in When an entity reclassifies comparative amounts,
accounting it shall disclose (including as at the beginning of
policy, the preceding period):
retrospective (a) the nature of the reclassification;
restatement or (b) the amount of each item or class of items that
reclassification is reclassified; and
(c) the reason for the reclassification.
When it is impracticable to reclassify comparative
amounts, an entity shall disclose:
(a) the reason for not reclassifying the amounts,
and
(b) the nature of the adjustments that would
have been made if the amounts had been
reclassified.
Consistency An entity shall retain the presentation and
of classification of items in the financial statements
presentation from one period to the next unless:
(a) presentation or classification would be more
appropriate having regard to the criteria for
the selection and application of accounting
policies in Ind AS 8; or
(b) an Ind AS requires a change in presentation.
STRUCTURE AND CONTENT
Identification An entity shall clearly identify each financial
of the financial statement and the notes.
statements
It shall display prominently:
(a) the name of the reporting entity or other
means of identification, and any change
in that information from the end of the
preceding reporting period;
(b) whether the financial statements are of an
individual entity or a group of entities;
(c) the date of the end of the reporting
period or the period covered by the set of
financial statements or notes;
(d) the presentation currency; and
(e) the level of rounding used in presenting
amounts in the financial statements.
The rounding off is acceptable as long as
the entity discloses it and does not omit
material information.

Information to m The balance sheet shall present line items
be presented and additional line items (including by
in the balance disaggregating the line items listed in
sheet paragraph 54), headings and subtotals.
m Presents current and non-current assets,
and current and non-current liabilities, as
separate classifications in its balance sheet.
m It shall not classify deferred tax assets
(liabilities) as current assets (liabilities).
Exception
An entity may present all assets and liabilities in
order of liquidity but shall disclose the amount
expected to be recovered or settled
(a) no more than twelve months after the
reporting period, and
(b) more than twelve months after the reporting
period.
m An entity is permitted to present some of
its assets and liabilities using a current/non-
current classification and others in order of
liquidity when this provides information that
is reliable and more relevant.
Current m Classify an asset as current when:
assets (a) it expects to realise 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 realise the asset within
twelve months after the reporting period;
or
(d) the asset is cash or a cash equivalent
unless the asset is restricted from being
exchanged or used to settle a liability for
at least twelve months after the reporting
period.
m Classify all other assets as non-current.
Note: The term ‘non-current’ includes tangible,
intangible and financial assets of a long-term
nature.
Operating m It is the time between the acquisition of
cycle assets for processing and their realisation in
cash or cash equivalents.
m When the entity’s normal operating cycle is
not clearly identifiable, it is assumed to be
twelve months.
m The same normal operating cycle applies to
the classification of an entity’s assets and
liabilities.
Current m An entity shall classify a liability as current
liabilities when:
(a) it expects to settle the liability in its
normal operating cycle;
(b) it holds the liability primarily for the
purpose of trading;
(c) the liability is due to be settled within
twelve months after the reporting period;
or
(d) it does not have an unconditional right to
defer settlement of the liability for at least
twelve months after the reporting period.
m An entity shall classify all other liabilities as
non-current.
m An entity classifies some operating items
like trade payables and some accruals for
employee and other operating costs (part
of the working capital) as current liabilities
even if they are due to be settled more than
twelve months after the reporting period.
FINANCIAL REPORTING
m Where there is a breach of a material
provision of a long-term loan arrangement
on or before the end of the reporting period
with the effect that the liability becomes
payable on demand on the reporting date,
the entity does not classify the liability
as current, if the lender agreed, after the
reporting period and before the approval
of the financial statements for issue, not to
demand payment as a consequence of the
breach.
Information Disclose sub-classifications of the line items
to be presented, classified in a manner appropriate to
presented the entity’s operations.
either in the
balance sheet
or in the
notes
Statement m The statement of profit and loss shall
of Profit and present, in addition to the profit or loss and
Loss other comprehensive income sections:
(a) profit or loss;
(b) total other comprehensive income;
(c) comprehensive income for the period,
being the total of profit or loss and other
comprehensive income.
m An entity shall not present any items of
income or expense as extraordinary items.
m An entity shall present an analysis of
expenses recognised in profit or loss using
a classification based on the nature of
expense method.
m An entity shall present additional line items,
headings and subtotals in the statement of
profit and loss, when such presentation is
relevant to an understanding of the entity’s
financial performance.
Information to m Present line items for the amounts for the
be presented period of:
in the other (a) items of OCI classified by nature and
comprehensive grouped into those that:
income (OCI) (i) will not be reclassified subsequently
section to profit or loss; and
(ii) will be reclassified subsequently
to profit or loss when specific
conditions are met.
(b) the share of OCI of associates and joint
ventures accounted for using the equity
method, separated into the share of
items that:
(i) will not be reclassified subsequently
to profit or loss; and
(ii) will be reclassified subsequently
to profit or loss when specific
conditions are met.
m Disclose the amount of income tax relating to
each item of OCI, including reclassification
adjustments, either in the statement of profit
and loss or in the notes.
m Present items of OCI either
(a) net of related tax effects, or
(b) before related tax effects with one
amount shown for the aggregate amount
of income tax relating to those items.
m If an entity elects alternative (b), it shall
allocate the tax between the items that
might be reclassified subsequently to the
profit or loss section and those that will not
be reclassified subsequently to the profit or
loss section.
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FINANCIAL REPORTING
Reclassification m When amounts previously recognised in
adjustment other comprehensive income are reclassified
to profit or loss they are referred as
reclassification adjustments.
m It is included with the related component of
other comprehensive income in the period
that the adjustment is reclassified to profit or
loss.
m These amounts may have been recognised
in OCI as unrealised gains in the current or
previous periods.
m Those unrealised gains must be deducted
from OCI in the period in which the realised
gains are reclassified to profit or loss to
avoid including them in total comprehensive
income twice.
m An entity may present reclassification
adjustments in the statement of profit and
loss or in the notes.
m An entity presenting reclassification
adjustments in the notes presents the items
of OCI after any related reclassification
adjustments.
m Reclassification adjustments do not arise
on changes in revaluation surplus or on
reameasurements of defined benefit plans
since they are recognised in OCI and are not
reclassified to profit or loss in subsequent
periods. Changes in revaluation surplus
may be transferred to retained earnings in
subsequent periods as the asset is used or
when it is derecognised.
m Reclassification adjustments do not arise
if a cash flow hedge or the accounting
for the time value of an option (or the
forward element of a forward contract
or the foreign currency basis spread of a
financial instrument) result in amounts
that are removed from the cash flow hedge
reserve or a separate component of equity,
respectively, and included directly in the
initial cost or other carrying amount of
an asset or a liability. These amounts are
directly transferred to assets or liabilities.
Information SOCE includes the following information:
to be (a) total comprehensive income for the period,
presented in showing separately the total amounts
the statement
attributable to owners of the parent and to
of changes
non-controlling interests;
in equity (b) for each component of equity, the effects of
(SOCE) retrospective application or retrospective
restatement;
(c) for each component of equity, a
reconciliation between the carrying amount
at the beginning and the end of the period,
separately (as a minimum) disclosing
changes resulting from:
(i) profit or loss;
(ii) other comprehensive income;
(iii) 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
(iv) any item recognised directly in equity
such as amount recognised directly in
equity as capital reserve.
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Information m Present, either in SOCE or in the notes,
to be the amount of dividends recognised as
presented in distributions to owners during the period, and
the statement the related amount of dividends per share.
of changes m Changes in an entity’s equity between the
in equity beginning and the end of the reporting
(SOCE) or in period reflect the increase or decrease in
its net assets during the period except for
the notes
changes resulting from transactions with
owners in their capacity as owners (such
as equity contributions, reacquisitions of
the entity’s own equity instruments and
dividends) and transaction costs directly
related to such transactions.
m Retrospective adjustments and retrospective
restatements are not changes in equity but
they are adjustments to the opening balance
of retained earnings, except when an Ind AS
requires retrospective adjustment of another
component of equity.
m Standard requires disclosure in the statement
of changes in equity of the total adjustment
to each component of equity resulting
from changes in accounting policies and,
separately, from corrections of errors.
m These adjustments are disclosed for each
prior period and the beginning of the period.
Notes m The notes shall:
-Structure (a) present information about the basis of
preparation of the financial statements
and the specific accounting policies;
(b) disclose the information required by Ind
ASs that is not presented elsewhere in
the financial statements; and
(c) provide information that is not presented
elsewhere in the financial statements,
but is relevant to an understanding of
any of them.
m Present notes in a systematic manner
m Cross-reference each item in the balance
sheet and in the statement of profit and loss,
and in the statements of changes in equity
and of cash flows to any related information
in the notes.
Notes - m An entity shall disclose its significant
Disclosure of accounting policies comprising:
accounting (a) the measurement basis (or bases) used in
policies preparing the financial statements; and
(b) the other accounting policies used that
are relevant to an understanding of the
financial statements.
m Additionally, it shall disclose, the judgements,
apart from those involving estimations,
that management has made in the process
of applying the entity’s accounting policies
and that have the most significant effect
on the amounts recognised in the financial
statements.
m Disclosure of an accounting policy may
be significant because of the nature of the
entity’s operations even if amounts for
current and prior periods are not material.
Notes An entity shall disclose information about the
-Sources of assumptions it makes about the future, and other
estimation major sources of estimation uncertainty at the
uncertainty end of the reporting period, that have a significant
risk of resulting in a material adjustment to the
carrying amounts of assets and liabilities within
the next financial year. In respect of those assets
and liabilities, the notes shall include details of:
(a) their nature, and
(b) their carrying amount as at the end of the
reporting period.
 FINANCIAL REPORTING
changes in revaluation surplus

reameasurements of defined benefit plans

gains and losses arising from translating the financial statements of a foreign
comprehensive income (OCI)

gains and losses from investments in equity instruments designated at fair value through OCI
Components of other

gains and losses on financial assets measured at fair value through OCI

the effective portion of gains and losses on hedging instruments in a cash flow hedge and the gains and losses
on hedging instruments that hedge investments in equity instruments measured at fair value through OCI

for particular liabilities designated as at FVTPL, the amount of the change in fair value that is attributable to changes in the
liability’s credit risk

changes in the value of the time value of options when separating the intrinsic value and time value of
an option contract and designating as the hedging instrument only the changes in the intrinsic value

changes in the value of the forward elements of forward contracts when separating the forward element
and spot element of a forward contract and designating as the hedging instrument only the changes in
the spot element, and changes in the value of the foreign currency basis spread of a financial instrument
when excluding it from the designation of that financial instrument as the hedging instrument

Indian Accounting Standard (Ind AS) : 34

Minimum components of an interim financial report

It shall include at a minimum

a condensed a condensed statement a condensed statement a condensed statement selected

balance sheet of profit and loss of changes in equity of cash flows explanatory notes

Important points to remember

1. The interim financial report is intended to provide an update on the latest complete set of annual financial statements.
2. It focuses on new activities, events, and circumstances and does not duplicate information previously reported.
3. Ind AS 34 does not prohibit or discourage an entity from publishing a complete set of financial statements (as described in
Ind AS 1) in its interim financial report.
4. Ind AS 34 does not prohibit or discourage an entity from including in condensed interim financial statements more than the
minimum line items or selected explanatory notes.
5. Ind AS 34 requires to include all the disclosures required by this Standard as well as those required by other Ind AS.

Form and content of interim financial statements

If in its interim financial report, an entity publishes

A complete set of A set of condensed A statement presenting

financial statements financial statements components of profit or loss

Its form and content shall conform to the It shall include, at a minimum, Entity shall present basic and
requirements of Ind AS 1 for a complete m Each of the headings and subtotals that diluted earnings per share for
set of financial statements. were included in its most recent annual that period.
financial statements.
m The selected explanatory notes as required
by this Standard.
m Additional line items or notes to avoid any
misleading of report.

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FINANCIAL REPORTING
Note:
1. An interim financial report is prepared on a consolidated basis if the entity’s most recent annual financial statements were
consolidated statements.
2. If an entity’s annual financial report includes the parent’s separate financial statements in addition to consolidated financial
statements, then Ind AS 34 does not restrict or mandate to include the parent’s separate statements in the entity’s interim financial
report prepared on a consolidated basis.

Significant events and transactions

Include in interim financial report Do not include in interim financial report

An explanation of events and transactions that are significant Insignificant updates to the information that was reported in
to an understanding of the changes in financial position and the notes in the most recent annual financial report because
performance of the entity since the end of the last annual the user will have access to the most recent annual financial
reporting period. report carrying such information.

Information disclosed in relation to those events and

transactions shall update the relevant information presented
in the most recent annual financial report.

List of events and transactions for which disclosures would be required if they are significant:
(a) the write-down of inventories to net realisable value and the reversal of such a write-down;
(b) recognition of a loss from the impairment of financial assets, property, plant and equipment, intangible assets, or other assets,
and the reversal of such an impairment loss;
(c) the reversal of any provisions for the costs of restructuring;
(d) acquisitions and disposals of items of property, plant and equipment;
(e) commitments for the purchase of property, plant and equipment;
(f ) litigation settlements;
(g) corrections of prior period errors;
(h) changes in the business or economic circumstances that affect the fair value of the entity’s financial assets and financial liabilities,
whether those assets or liabilities are recognised at fair value or amortised cost;
(i) any loan default or breach of a loan agreement that has not been remedied on or before the end of the reporting period;
(j) related party transactions;
(k) transfers between levels of the fair value hierarchy used in measuring the fair value of financial instruments;
(l) changes in the classification of financial assets as a result of a change in the purpose or use of those assets; and
(m) changes in contingent liabilities or contingent assets.
Note: The list is not exhaustive.

Other Disclosures

Shall be given (Refer the list in para 16A of Ind AS 34)

Either Or

In the interim financial statements Incorporated by cross-reference from the interim financial statements to some other
statement (such as management commentary or risk report)

Statements should be available to users of the financial statements on the same terms as the interim financial statements and at
the same time otherwise the interim financial statements shall be considered as incomplete.

The information shall normally be reported on a financial year-to-date basis.

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 FINANCIAL REPORTING
Periods for which interim financial statements are required to be presented

Interim reports shall include interim financial statements (condensed or complete) i.e.

Statements of Statement of Statement of cash

Balance sheet profit and loss changes in equity flows

m as of the end of the
current interim
period.
m a comparative balance
sheet as of the end
of the immediately
preceding financial
year.
m for the current interim period.
m cumulatively for the current
financial year to date.
m comparative statements
of profit and loss for the
comparable interim periods
(current and year-to-date) of
the immediately preceding
financial year.
m cumulatively for the m cumulatively for the
current financial year to current financial year to
date. date.
m comparative statement m a comparative statement
for the comparable year- for the comparable year-
to-date period of the to-date period of the
immediately preceding immediately preceding
financial year. financial year.

Note: For an entity whose business is highly seasonal, financial information for the twelve months up to the end of the interim period and
comparative information for the prior twelve-month period may be useful.

Points to remember

Disclosure of If an entity’s interim financial report is in compliance with this Standard, that fact shall be disclosed.
compliance
with Ind AS An interim financial report shall be described as complying with Ind ASs when it complies with all of the requirements of
Ind ASs.
Materiality In deciding how to recognise, measure, classify, or disclose an item for interim financial reporting purposes, materiality
shall be assessed in relation to the interim period financial data.
It shall be recognised that interim measurements may rely on estimates to a greater extent than measurements of annual
financial data.
Disclosure If an estimate of an amount reported in an interim period is changed significantly during the final interim period of the
in annual financial year but a separate financial report is not published for that final interim period, the nature and amount of that
financial change in estimate shall be disclosed in a note to the annual financial statements for that financial year.
statements
An entity is not required to include additional interim period financial information in its annual financial statements.

Recognition and Measurement

Same accounting m Apply the same accounting policies in its interim financial statements as are applied in its annual financial
policies as annual statements, except for accounting policy changes made after the date of the most recent annual financial
statements that are to be reflected in the next annual financial statements.
m Measurements for interim reporting purposes shall be made on a year-to-date basis.
m The amounts reported in prior interim periods are not retrospectively adjusted. However, that the nature and
amount of any significant changes in estimates be disclosed.
Revenues received m Such revenues shall not be anticipated or deferred as of an interim date if anticipation or deferral would not be
seasonally, appropriate at the end of the entity’s financial year.
cyclically, or
occasionally m Some entities consistently earn more revenues in certain interim periods of a financial year than in other interim
periods. Such revenues are recognised when they occur.
Costs incurred Such costs shall be anticipated or deferred for interim reporting purposes if, and only if, it is also appropriate to
unevenly during anticipate or defer that type of cost at the end of the financial year.
the financial year
Use of estimates Preparation of interim financial reports generally will require a greater use of estimation methods than annual
financial reports.
Restatement A change in accounting policy, shall be reflected:
of previously (a) by retrospective application, with restatement of prior period financial data as far back as is practicable; or
reported interim
(b) if the cumulative amount of the adjustment relating to prior financial years is impracticable to determine,
periods
then under Ind AS 8 the new policy is applied prospectively from the earliest date practicable.
Interim Financial An entity shall not reverse an impairment loss recognised in a previous interim period in respect of goodwill.
Reporting and
Impairment

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FINANCIAL REPORTING
Indian Accounting Standard (Ind AS) 7 : Statement of Cash Flows

Objectives of Ind AS 7

To assess To require

the ability of the entity to the needs of the entity to the timing and certainty the provision of information about
generate cash and cash utilise those cash flows. of generation of cash the historical changes in cash and
equivalents. flows. cash equivalents of an entity.

Presentation of a statement of cash flows

Report cash flows (inflows and outflows) during the period as

Operating activities Investing activities Financing activities Cash and cash equivalents

These are the Investing activities Financing activities Cash Cash equivalents
principal revenue- are the acquisition are activities that
producing activities and disposal result in changes
of the entity other of long-term in the size and It Are short-
than investing or assets and other composition of the comprises term, highly
financing activities investments not contributed equity cash on liquid
included in cash and borrowings of hand & investments
equivalents the entity demand
deposits Are readily
Reporting convertible
An entity shall report separately to known
major classes of gross cash amounts of
receipts and gross cash payments cash
arising from investing and
Under direct Under indirect financing activities
method method Are subject
to an
insignificant
risk of
Whereby major Whereby profit or loss is adjusted for changes in
classes of gross • non-cash transactions value
cash receipts • any deferrals or accruals of past
and gross cash or future operating cash receipts
payments are or payments Are not for
disclosed • items of income or expense investment
associated with investing or purposes
financing cash flows
has a short
maturity of,
Exception say, 3 months
or less from
Entities are encouraged to follow the direct method. The Equity investments are excluded the date of
direct method provides information which may be useful from cash equivalents acquisition
in estimating future cash flows and which is not available
under the indirect method.

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 FINANCIAL REPORTING
Cash flows arising from operating activities Cash flows arising from investing activities

Key indicator Examples Represent Examples

of the extent the extent
to which the to which
operations expenditures
of the entity have been
have generated (a) Cash receipts from the sale (a) Cash payments to acquire
of goods and the rendering of made for property, plant and equipment,
sufficient cash resources
flows to services. intangibles and other long-term
intended
• repay loans (b) Cash receipts from royalties, to generate assets. These payments include
• maintain the fees, commissions and other future income those relating to capitalised
operating revenue. and cash development costs and self-
capability of (c) Cash payments to suppliers for flows. constructed property, plant and
the entity goods and services. equipment;
• pay
dividends (d) Cash payments to and on behalf (b) Cash receipts from sales of
• make new of employees. property, plant and equipment,
(e) Cash receipts and cash payments Only intangibles and other long-term
investments expenditures
without of an insurance entity for that result in assets;
recourse premiums and claims, annuities a recognised (c) Cash payments to acquire equity
to external and other policy benefits. asset in the or debt instruments of other
sources of (f) Cash payments or refunds of balance sheet entities and interests in joint
financing income taxes unless they can are eligible for ventures (other than payments
be specifically identified with classification for those instruments considered
financing and investing activities. as investing to be cash equivalents or those
(g) Cash receipts and payments activities. held for dealing or trading
Primarily
derived from from contracts held for dealing purposes);
the principal or trading purposes. (d) Cash receipts from sales of
revenue- (h) Cash flows arising from the equity or debt instruments
producing purchase and sale of dealing or of other entities and interests
activities of trading securities. in joint ventures (other than
the entity. (i) Cash advances and loans made receipts for those instruments
by financial institutions since considered to be cash
they relate to their main revenue- equivalents and those held for
producing activity. dealing or trading purposes);
Generally, (e) Cash advances and loans made
result to other parties (other than
from the advances and loans made by a
transactions financial institution);
and other (f ) Cash receipts from the
events that repayment of advances and
enter into the
determination loans made to other parties
of profit or (other than advances and loans
loss. of a financial institution);
(g) Cash payments for futures
contracts, forward contracts,
option contracts and swap
Cash flows arising from financing activities contracts except when the
contracts are held for dealing
or trading purposes, or the
payments are classified as
Useful in Examples financing activities; and
predicting (h) Cash receipts from futures
claims on contracts, forward contracts,
future cash
flows by (a) Cash proceeds from issuing option contracts and swap
providers of shares or other equity contracts except when the
capital to the instruments; contracts are held for dealing or
entity (b) Cash payments to owners to trading purposes, or the receipts
acquire or redeem the entity’s are classified as financing
shares; activities.
(c) Cash proceeds from issuing
debentures, loans, notes, bonds, Note: When a contract is
mortgages and other short-term accounted for as a hedge of an
or long-term borrowings; identifiable position the cash
(d) Cash repayments of amounts flows of the contract are classified
borrowed; and in the same manner as the cash
(e) Cash payments by a lessee for flows of the position being hedged.
the reduction of the outstanding
liability relating to a finance
lease.

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FINANCIAL REPORTING
Reporting cash flows on a net basis

Other than financial institutions Financial institutions

Cash flows arising from operating, investing or

financing activities may be reported on a net basis
Cash receipts and payments on behalf
of customers when the cash flows
reflect the activities of the customer
rather than those of the entity
Examples of cash receipts and payments
referred to in paragraph 22(a) are:
(a) The acceptance and repayment
of demand deposits of a bank;
(b) Funds held for customers
by an investment entity; and
(c) Rents collected on behalf
of, and paid over to, the
owners of properties.
Cash receipts and payments for items in
which the turnover is quick, the amounts
are large, and the maturities are short
Examples of cash receipts and payments
referred to in paragraph 22(b) are advances
made for, and the repayment of:
(a) Principal amounts relating to credit
card customers;
(b) The purchase and sale of investments;
and
(c) Other short-term borrowings, for
example, those which have a maturity
period of three months or less.
Cash flows arising from each of the
following activities of a financial
institution may be reported on a net basis:
(a) Cash receipts and payments for
the acceptance and repayment of
deposits with a fixed maturity date;
(b) The placement of deposits with
and withdrawal of deposits from
other financial institutions; and
(c) Cash advances and loans made
to customers and the repayment
of those advances and loans.

Foreign currency cash flows

Arising from transactions in a foreign currency Of a foreign subsidiary

Recorded in an entity’s functional currency Cash

flows of Exchange rates between the functional
a foreign currency and the foreign currency at
subsidiary the dates of the cash flows
Foreign Exchange rate between the functional
currency currency and the foreign currency at
amount the date of the cash flow

Note:
1. Cash flows denominated in a foreign currency are reported in a manner consistent with Ind AS 21.
2. A weighted average exchange rate for a period may be used for recording foreign currency transactions or the translation of the cash
flows of a foreign subsidiary.
3. Ind AS 21 does not permit use of the exchange rate at the end of the reporting period when translating the cash flows of a foreign
subsidiary.
Important Points
1. Unrealised gains and losses arising from are not cash flows.
changes in foreign currency exchange rates
2. The effect of exchange rate changes on is reported in the statement of cash flows in order to reconcile cash and cash
cash and cash equivalents held or due in a equivalents at the beginning and the end of the period.
foreign currency is presented separately from cash flows from operating, investing and
financing activities and includes the differences, if any, had those cash flows
been reported at end of period exchange rates.

Shall be
separately Investments W h e n an investor restricts its reporting
disclosed Tax cash in accounted in the statement of cash flows
When it is flow is
Cash practicable subsidiaries, for by use of to the cash flows between itself
classified associates the equity or and the investee, for example, to
flows to identify as an
arising and joint cost method dividends and advances.
investing or ventures
from financing
taxes on When it is Shall be classified W h e n Includes in its statement of cash
impracticable as cash flows from activity as reporting its flows:
income appropriate
to identify operating activities interest in • the cash flows in respect of its
when impracticable an associate investments in the associate
to identify with or a joint or joint venture, and
financing and venture using • distributions and other
investing activities the equity payments or receipts between
Note: When tax cash flows are allocated over more than one class of method it and the associate or joint
activity, the total amount of taxes paid is disclosed. venture.

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 FINANCIAL REPORTING
Interest and Dividends

Cash flows from interest and dividends received and paid shall
each be disclosed separately

In case of financial institutions In the case of other entities

Interest paid Interest and dividends Dividends paid Dividends Interest paid Interest and dividends
received paid received

Classified as cash Classified as cash

flows arising from Classified as cash flows from financing activities flows from investing
operating activities activities

They are costs of obtaining financial resources

They are returns on
investments

Changes in ownership interests in subsidiaries

and other businesses

Cash flows arising from

Obtaining control of Losing control of subsidiaries

subsidiaries or other businesses or other businesses

Shall be classified as Shall be presented Shall disclose, in aggregate, during the period
investing activities separately

The cash flow effects of losing control are not

deducted from those of obtaining control

The total consideration The portion of the The amount of cash and cash The amount of the assets and
paid or received consideration consisting of equivalents in the subsidiaries liabilities other than cash or cash
cash and cash equivalents or other businesses over which equivalents in the subsidiaries
control is obtained or lost or other businesses over which
control is obtained or lost,
Cash flows arising from changes in ownership interests in a summarised by each major
subsidiary that do not result in a loss of control. category

Shall be classified as cash flows from financing activities,

unless the subsidiary is held by an investment entity.
Important points/disclosures
Investing and financing
transactions that do not require
the use of cash or cash equivalents
Components of cash and cash
equivalents
Other Disclosures
Need not apply to an investment in a subsidiary measured at
fair value through profit or loss (FVTPL).
m Shall be excluded from a statement of cash flows.
m Disclosed elsewhere in the financial statements.
m Disclose the components of cash and cash equivalents.
m Shall present a reconciliation of the amounts in its statement of cash flows with the equivalent items
reported in the balance sheet.
m Disclose the policy which entity adopts in determining the composition of cash and cash equivalents.
Disclose, together with a commentary by management, the amount of significant cash and cash
equivalent balances held and are not available for use by the group.
Note: The requirements shall be equally applicable to the entities in case of separate financial
statements also.

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FINANCIAL REPORTING
Indian Accounting Standard (Ind AS) 8 :
Accounting Policies, Changes in Accounting Estimates and Errors
Objective and Scope

Is to prescribe

The criteria for selecting and changing accounting policies The accounting treatment and disclosure of

Changes in accounting policies Changes in accounting estimates Corrections of errors

Important Definitions
1. Accounting Specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial
policies statements.
2. A change in m It is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic
accounting consumption of an asset.
estimate m Change in accounting estimates result from new information or new developments.
m It is not corrections of errors.
m Effect of such a change is given prospectively.
3. Prior period m They are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods
errors arising from a failure to use, or misuse of, reliable information
m Such errors include the effects of
 mathematical mistakes,
 mistakes in applying accounting policies,
 oversights or misinterpretations of facts, and
 fraud.
4. Retrospective It is applying a new accounting policy to transactions, other events and conditions as if that policy had always been
application applied unless it is impracticable to do so.
5. Retrospective It is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a
restatement prior period error had never occurred.

Accounting Policies

Selection and application of accounting policies Changes in accounting policies (Refer Note 3)

When an Ind AS specifically
applies to a transaction,
other event or condition
The accounting policy(s)
applied to the item shall
be determined as per that
Ind AS
When no Ind AS specifically
applies to a transaction,
other event or condition
Management shall use its
judgement in developing
and applying an accounting
policy (Refer Note 1)
If the change is If the change results providing reliable and
required by an more relevant information about the effects
Ind AS of transactions, other events or conditions
on the entity’s financial position, financial
performance or cash flows
When an entity changes an accounting policy voluntarily, it
shall apply the change retrospectively, if specific transitional
provisions does not apply to that change. (Refer Note 4)

Retrospective application of a change in accounting policy

Adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative
amounts disclosed for each prior period presented as if the new accounting policy had always been applied. Usually the adjustment
is made to retained earnings.

Exception

When it is impracticable to determine the period-specific effects of changing an accounting policy on comparative information for
one or more prior periods presented,
m apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for
which retrospective application is practicable.
If it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting
policy to all prior periods,
m adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable.

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 FINANCIAL REPORTING
Notes:
1. For judgement, management may also first consider the most recent pronouncements of International Accounting Standards Board
and in absence thereof those of the other standard-setting bodies that use a similar conceptual framework to develop accounting
standards, other accounting literature and accepted industry practices.
2. An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions.
3. The following are not changes in accounting policies:
(a) the application of an accounting policy for transactions, other events or conditions that differ in substance from those previously
occurring; and
(b) the application of a new accounting policy for transactions, other events or conditions that did not occur previously or were
immaterial.
4. Early application of an Ind AS is not a voluntary change in accounting policy.

Changes in Accounting Estimates

Reasons for revision in 1. When a change occur in the circumstances on which the estimate was based.
accounting estimates 2. When a change is as a result of new information or more experience.
Nature of change in m A change in accounting estimates neither relates to prior periods nor is a correction of an error.
accounting estimates m When it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate,
the change is treated as a change in an accounting estimate.
Treatment of a change m The effect of change in an accounting estimate, shall be recognised prospectively by including it in profit
in accounting estimates or loss in:
 the period of the change, if the change affects that period only; or
 the period of the change and future periods, if the change affects both.
m To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates
to an item of equity, it shall be recognised by adjusting the carrying amount of the related asset, liability or
equity item in the period of the change.
Errors
Stage of occurrence Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of
of errors financial statements.
Effects of errors Financial statements will not be considered as complied with Ind ASs if they contain either material errors or
immaterial errors made intentionally to achieve a particular presentation of an entity’s financial position, financial
performance or cash flows.
Nature of correction Corrections of errors are distinguished from changes in accounting estimates.
of errors
Accounting m Prior period errors are corrected in the comparative information presented in the financial statements for that
treatment for subsequent period.
m An entity shall correct material prior period errors retrospectively in the first set of financial statements
correction of such approved for issue after their discovery by:
errors  restating the comparative amounts for the prior period(s) presented in which the error occurred; or
 if the error occurred before the earliest prior period presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period presented.
The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered.
Exception
When it is impracticable to determine the amount of an error (eg a mistake in applying an accounting policy) for all
prior periods, the entity restates the comparative information prospectively from the earliest date practicable.

Indian Accounting Standard (Ind AS) 10 : Events after the Reporting Period

Objective

Ind AS 10 prescribes

When to adjust financial Disclosures that an Not to prepare financial statements on

statements for events entity should give about a going concern basis if events after the
after the reporting period reporting period indicate that the going
concern assumption is not appropriate

Date when the financial statements

Events after the reporting period
were approved for issue

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FINANCIAL REPORTING
Both favourable and unfavourable By the Board of Directors in case of
Events after the a company
reporting period
That occur between the end of the
reporting period and the date when By the corresponding approving
the financial statements are approved authority in case of any other entity

Adjusting events Non-adjusting events

Those that provide evidence of

Those that are indicative of conditions
conditions that existed at the
that arose after the reporting period
end of the reporting period

Carve Out: Where there is a breach of a material provision of a long-term loan arrangement on or before the end of the reporting
period with the effect that the liability becomes payable on demand on the reporting date, the agreement by lender before the
approval of the financial statements for issue, to not demand payment as a consequence of the breach, shall be considered as an
adjusting event.

Recognition, Measurement and Disclosure

Adjusting events after the reporting period Non-adjusting events after the reporting period

Adjust the amounts recognised in

Do not adjust the amounts recognised in the
the financial statements to reflect it
financial statements to reflect it

Examples of adjusting events:

(a) Adjust any previously recognised provision or recognises a new provision when the
Example of a non-adjusting
related court case is settled before the financial statements are approved as per Ind
event
AS 37.
A decline in fair value
(b) Account for the impairment (if any) on receipt of information after the reporting
of investments between
period like: the end of the reporting
(i) the bankruptcy of a customer that occurs after the reporting period; and period and the date when
(ii) the sale of inventories after the reporting period may give evidence about their the financial statements
NRV at the end of the reporting period. are approved for issue.
(c) the determination after the reporting period of the cost of assets purchased, or the
proceeds from assets sold, before the end of the reporting period.
(d) the determination after the reporting period of the amount of profit-sharing or
bonus payments, if the entity had a present legal or constructive obligation at the
end of the reporting period to make such payments. If non-adjusting events after the
(e) the discovery of fraud or errors that show that the financial statements are incorrect. reporting period are material,
then disclose
• the nature of the event; and
• an estimate of its financial
effect, or a statement that
such an estimate cannot be
made.

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 FINANCIAL REPORTING
Important points to remember
S. No. Item Timing Treatment Reason
1 Dividends Declared after the reporting m Do not recognise it as a No obligation exists at that time.
period but before approval of liability at the end of the
financial statements reporting period.
m Disclosed in the notes.
2. Going concern If management determines after m Do not prepare the financial The deterioration in operating
the reporting period either that statements on a going results and financial position
it intends to liquidate the entity concern basis; or after the reporting period may
or to cease trading m Make necessary disclosure be so pervasive that it may
of not following going require a fundamental change in
concern basis or events or the basis of accounting.
conditions that may cast
significant doubt upon the
entity’s ability to continue as
a going concern.
3. Date of approval Approved after the reporting Disclose the date when the Important for users to know
of financial period financial statements when the financial statements
were
statements for approved for issue and who gave
were approved for issue because
issue that approval. the financial statements do not
reflect events after this date.
4. U p d a t i n g Received information after the Update disclosures that relate to When the information does
disclosure about reporting period new information / conditions. not affect the amounts that
conditions at it recognises in its financial
the end of the statements, disclosures are
reporting period required.

Distribution of Non-cash Assets to Owners as dividend by an entity

Timing of recognition of dividend Measurement of a dividend Presentation and disclosures

payable by an entity payable by an entity by an entity

When the dividend is Presentation

m Measure a liability at the fair value
appropriately authorised
of the assets to be distributed
/ approved by the m If an entity gives a choice of
relevant authority, eg receiving either a non-cash
the shareholders or the asset or a cash alternative,
management as per the  estimate both the fair
jurisdiction. value of each alternative
and the associated
probability of owners
selecting each alternative.
m At the end of each reporting period
and at the date of settlement
 review and adjust the
carrying amount of the
dividend payable, with
any changes recognised in
equity as adjustments to the
amount of the distribution
m Account for any difference
between the carrying amount
of the assets distributed and the
carrying amount of the dividend
payable on its settlement
 by recognising the difference,
if any, in profit or loss.
The difference between the carrying
amount of the assets distributed
and the carrying amount of the
dividend payable is presented as a
separate line item in profit or loss.
Disclosure
An entity shall disclose
(a) the carrying amount of the
dividend payable at the beginning
and end of the period; and
(b) the increase or decrease in the
carrying amount recognised in the
period as result of a change in the fair
value of the assets to be distributed.
If dividend is declared to distribute a non-
cash asset (non-adjusting event), disclose
with respect to the asset to be distributed:
(a) its nature;
(b) its carrying amount and fair value at the
end of the reporting period; and
(c) if carrying amount and fair value is
different than the information about
the method(s) used to measure that fair
value.

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FINANCIAL REPORTING
Indian Accounting Standard (Ind AS) 115 :
Revenue from Contracts with Customers
Ind AS 115 is based on a core principle that requires an entity to recognise revenue:
(a) In a manner that depicts the transfer of goods or services to customers.
(b) At an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services.
To achieve the core principle, an entity should apply the following five-step model:
Identify the Identify the Allocate the transaction Recognise revenue when
Determine the
contract(s) with a performance price to the performance or as an entity satisfies
transaction price
customer obligations obligations performance obligations

Step 1 : Identify the contract(s) with a customer

An accounting contract exists only when an arrangement with a customer meets each of the following five criteria:

Consider if the contract meets each of the five criteria to pass Step 1: Continue to assess the contract to
determine if the Step 1 criteria are met.
Have the parties approved the contract? (approval may be written, oral, or implied, as
long as the parties intend to be bound by the terms and conditions of the contract)
No Recognise consideration received
Yes
as a liability until each of the five
Can the entity identify each party's rights regarding the goods/services to be transferred? criteria in Step 1 are met or one of
No
Yes the following occurs:
Can the entity identify the payment terms for the goods/services to be transferred? 1. entity has no remaining
No performance obligations and
Yes
substantially all consideration
Does the contract have commercial substance? has been received and is non-
No
Yes refundable.
Is it probable that the entity will collect substantially all of the consideration to which it will 2. contract is terminated
be entitled in exchange for the goods/services that will be transferred to the customer? and consideration is non-
No
Yes refundable.
Proceed to Step 2 and only reassess the Step 1 criteria if there is an
indication of a significant change in facts and circumstances.

Notes:
1. If at the inception of an arrangement, an entity concludes that the criteria below are not met, it should not apply Steps 2 through 5
of the model until it determines that the Step 1 criteria are subsequently met.
2. When a contract meets the five criteria and ‘passes’ Step 1, the entity will not reassess the Step 1 criteria unless there is an
indication of a significant change in facts and circumstances.
3. Two or more contracts may need to be accounted for as a single contract if they are entered into at or near the same time with the
same customer (or with related parties), and if one of the following conditions exists:
(a) The contracts are negotiated as a package with a single commercial objective;
(b) The amount of consideration paid in one contract depends on the price or performance in the other contract; or
(c) The goods or services promised in the contract are a single performance obligation.

Combining contracts
An entity is required to combine two or more contracts and account for them as a single contract if they are entered into at or near the same
time and meet any one of the following criteria:
Yes
Are the contracts negotiated as a package with a single commercial objective?

No

Whether consideration in one contract depends on the price or performance of Yes

another contract?
Treat as a single
No contract

Whether goods or services promised in the contract are a single performance Yes
obligation?

No

Treat as separate contracts

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 FINANCIAL REPORTING
Accounting for the modification

Are both of the following true: Yes Account for the modification as a separate
m The scope of the contract increases because distinct promised contract.
goods or services are added to the contract.
m The consideration increases by the stand-alone selling price of the
added goods or services. Allocate the remaining transaction price
not yet recognised to the outstanding
No performance obligations. In other words,
Yes treat as a termination of the old contract
Are the remaining goods or services distinct from the goods or services and the creation of a new contract.
transferred on or before the date of the contract modification?

No
Account for the contract modification as
Are the remaining goods or services not distinct and, therefore, form Yes if it were a part of the existing contract—
part of a single performance obligation that is partially satisfied at the that is, the adjustment to revenue is made
date of the contract modification? on a cumulative catch-up basis.

No
Are some of the remaining goods or services distinct and others not Yes Follow the guidance for distinct and non-
distinct? distinct remaining goods or services.

Step 2: Identifying performance obligations

A contract with a customer may also include promises that are implied by an entity’s customary business practices, published policies or
specific statements if, at the time of entering into the contract, those promises create a valid expectation of the customer that the entity will
transfer a good or service to the customer. Therefore. performance obligations under a contract with the customer are not always explicit or
clearly mentioned in the contract, but there can be implied promises or performance obligation under the contract as well.
Performance obligations has been defined as a promise in a contract with a customer to transfer to the customer either:
(a) good or service (or a bundle of goods or services) that is distinct; or
(b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

Distinct

Customer can benefit either alone or Separately identifiable from other

with other readily available resources promises in the contract

Readily available resource = Sold separately Significant integration No significant Not highly depedent or
customisation or interrelated
or customer has already obtained services not provided modification

Promise to This will be considered as single performance
transfer a series obligation, if the consumption of those
of distinct goods
services by the customers is symmetrical
or services
i.e. they meet both of the following criteria:
(a) each distinct good or service would meet
the criteria to be a performance obligation
satisfied over time; and
(b) In each transfer, same method is used to
measure the entity’s progress towards
complete satisfaction of the performance
obligation.
Multiple Element m If the goods or services are not considered
Arrangements/ as distinct, those goods or services are
Goods and combined with other goods or services
services that are under the contract till the time the entity
not distinct identifies a bundle of distinct goods or
services.
m The combination would result in
accounting of multiple goods or services
in the contract as a single performance
obligation.
m An entity may end up accounting for all the
goods or services promised in a contract
as a single performance obligation if the
entire bundle of promised goods and
services is the only distinct performance
obligation identified.

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FINANCIAL REPORTING
Customer m When an entity grants a customer the
options for option to acquire additional goods or
additional goods services, that option is only a separate
or services performance obligation if it provides
a material right to the customer. The
right is material if it results in a discount
that the customer would not receive
without entering into the contract.
 If the option provides a material right
to the customer, the customer in
effect pays the entity in advance for
future goods or services and the entity
recognises revenue when those future
goods or services are transferred or
when the option expires.
m If the discounted price in the option
reflects the stand-alone selling price
(separate from any existing relationship
or contract), the entity is deemed to
have made a marketing offer rather than
having granted a material right.
 Account for only when the customer
exercises the option to purchase the
additional goods or services.
 Allocate the transaction price to
performance obligations on a relative
stand-alone selling price basis.
 If the stand-alone selling price
for a customer’s option to acquire
additional goods or services is not
directly observable, an entity shall
estimate it. That estimate shall reflect
the discount that the customer would
obtain when exercising the option,
adjusted for both of the following:
(a) any discount that the customer
could receive without exercising
the option; and
(b) the likelihood that the option will
be exercised.
Long term m It may be appropriate to treat long term
arrangements arrangements as separate one-year
performance obligations, if the contract
can be renewed or cancelled by either
party at discrete points in time (that is, at
the end of each service year).
m Separately account for its rights and
obligations for each period in which the
contract cannot be cancelled by either
party.
m When the consideration is fixed,
the accounting generally will not
change regardless of whether a single
performance obligation or multiple
performance obligations are identified.
Step 3: Determining the transaction price
• The consideration promised in a contract with a customer may
include fixed amounts, variable amounts, or both.
• For the purpose of determining the transaction price, an entity
shall assume that the goods or services will be transferred to the
customer as promised in accordance with the existing contract
and that the contract will not be cancelled, renewed or modified.
• The nature, timing and amount of consideration promised by a
customer affect the estimate of the transaction price.
• When determining the transaction price, an entity shall consider
the effects of all of the following:
24 May 2019 The Chartered Accountant Student
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Consignment m Revenue generally would not be
Arrangements recognised for consignment arrangements
when the goods are delivered to the
consignee because control has not yet
transferred.
m Revenue is recognised when the entity
has transferred control of the goods to the
consignor or the end consumer.
Principal vs agent m When the entity is the principal in the
consideration arrangement, the revenue recognised
is the gross amount to which the entity
expects to be entitled.
m When the entity is acting as an agent, the
revenue recognised is the net amount i.e.
the amount, entity is entitled to retain in
return for its services under the contract.
The entity’s fee or commission may be
the net amount of consideration that the
entity retains after paying the other party
the consideration received in exchange
for the goods or services to be provided
by that party.
Since the identification of the principal
in a contract is not always clear, Ind AS
115 provides following indicators that a
performance obligation involves an agency
relationship:
(a) the entity is primarily responsible for
fulfilling the contract. This typically
includes responsibility for the
acceptability of the specified good or
service;
(b) the entity has inventory risk before
the specified good or service has been
transferred to a customer or after transfer
of control to the customer (for example, if
the customer has a right of return).
(c) the entity has discretion in establishing
prices for the goods or services.
Non-refundable It is an advance payment for future goods
upfront fees and services and, therefore, would be
recognised as revenue when those future
goods and services are provided, even
though it relates to an activity undertaken
at or near contract inception to fulfil the
contract and the activity does not result in
the transfer of a promised good or service
to the customer.
Significant
financing
component
Variable
Consideration consideration
payable to
customer
Transaction
price
constraining
Non-cash estimates
consideration of variable
consideration

Variable consideration
1 Penalties m Accounted for as per the substance of the
contract.
m Where the penalty is inherent in
determination of transaction price, it
shall form part of variable consideration.
2 Estimating Estimate an amount of variable consideration
the amount by using either of the following methods:
of variable (a) Expected value -
consideration It is the sum of probability-weighted
amounts in a range of possible
consideration amounts.
It will be appropriate if an entity has a
large number of contracts with similar
characteristics.
(b) Most likely amount –
It is the single most likely amount in a
range of possible consideration amounts
(i.e. the single most likely outcome of the
contract).
It will be appropriate, if the contract has
only two possible outcomes.
An entity shall apply one method consistently
throughout the contract.
3 Refund m Recognise a refund liability if the entity
liabilities receives consideration from a customer
and expects to refund some or all of that
consideration to the customer.
m A refund liability is measured at the
amount of consideration received /
receivable for which the entity does not
expect to be entitled (i.e. amounts not
included in the transaction price).
m The refund liability shall be updated
at the end of each reporting period for
changes in circumstances.
4 Constraining Include in the transaction price some or all of
estimates an amount of variable consideration estimated
of variable only to the extent that it is highly probable
consideration that a significant reversal in the amount
of cumulative revenue recognised will not
occur when the uncertainty associated with
the variable consideration is subsequently
resolved.
5 Reassessment At the end of each reporting period, account
of variable for changes in the transaction price, if any.
consideration
Warranties
Customer has option to purchase separately
Distinct service, as the entity promises to provide service
in addition to the product’s described functionality
Account for the promised warranty as a performance
obligation and allocate a portion of the transaction price
to that performance obligation
FINANCIAL REPORTING
6 Sale with m To account for the transfer of products with
a right of a right of return (and for some services that
return are provided subject to a refund), an entity
shall recognise all of the following:
(a) revenue for the transferred products
in the amount of consideration
to which the entity expects to be
entitled (therefore, revenue would
not be recognised for the products
expected to be returned);
(b) a refund liability; and
(c) an asset (and corresponding
adjustment to cost of sales) for its right
to recover products from customers
on settling the refund liability.
m Promise to stand ready to accept a
returned product during the return
period shall not be accounted for as a
performance obligation in addition to the
obligation to provide a refund.
m For any amounts received (or receivable)
for which an entity does not expect to be
entitled, the entity shall not recognise
revenue when it transfers products to
customers but shall recognise those
amounts received (or receivable) as a
refund liability.
m Subsequently, at the end of each
reporting period, the entity shall update
its assessment of amounts for which it
expects to be entitled in exchange for
the transferred products and make a
corresponding change to the transaction
price and, therefore, in the amount of
revenue recognised.
m An entity shall update the measurement
of the refund liability at the end of
each reporting period for changes
in expectations about the amount
of refunds. An entity shall recognise
corresponding adjustments as revenue
(or reductions of revenue).
m An asset recognised for an entity’s right
to recover products from a customer on
settling a refund liability shall initially
be measured by reference to the former
carrying amount of the product less any
expected costs to recover those products.
m An entity shall present the asset separately
from the refund liability.
m Exchanges by customers of one product for
another of the same type, quality, condition
and price are not considered returns.
m Return of a defective product in exchange
for a functioning product shall be
evaluated as warranties.
Customer does not have option to purchase separately
Warranty provides an assurance that the product complies
with agreed-upon specifications
Account for the warranty in accordance with Ind AS 37
The Chartered Accountant Student May 2019 25
20
FINANCIAL REPORTING
Significant Adjust the promised amount of consideration for the
financing effects of the time value of money.
component In assessing whether a contract contains a financing
component and whether that financing component
is significant to the contract, consider both
(a) the difference, if any, between the amount of
promised consideration and the cash selling
price of the promised goods or services; and
(b) the combined effect of both of the following:
(i) the expected length of time between when
the entity transfers the promised goods
or services to the customer and when the
customer pays for those goods or services;
and
(ii) the prevailing interest rates in the relevant
market.
Use the discount rate that would be reflected in a
separate financing transaction between the entity
and its customer at contract inception.
After contract inception, an entity shall not update
the discount rate for changes in interest rates or
other circumstances.
If the combined effects for a portfolio of similar
contracts were material to the entity as a whole, but
if the effects of the financing component were not
material to the individual contract, such financing
component shall not be considered significant and
shall not be separately accounted for.
Exception
A contract with a customer would not have a
significant financing component if any of the
following factors exist:
(a) the customer paid for the goods or services
in advance and the timing of the transfer of
those goods or services is at the discretion of the
customer.
(b) a substantial amount of the consideration
promised by the customer is variable and
the amount or timing of that consideration
varies on the basis of the occurrence or
non-occurrence of a future event that is not
substantially within the control of the
customer or the entity.
(c) the difference between the promised
consideration and the cash selling price of
the good or service arises for reasons other
than the provision of finance to either the
customer or the entity, and the difference
between those amounts is proportional to the
reason for the difference.
Non-cash m measure the non-cash consideration (or promise
consideration of non-cash consideration) at fair value.
m And, if it cannot reasonably estimate the
fair value of the non-cash consideration, it
shall measure the consideration indirectly
by reference to the stand-alone selling price
of the goods or services promised to the
customer (or class of customer) in exchange
for the consideration.
Subsequent m If the fair value of the non-cash consideration
measurement varies after contract inception because of its
of non-cash form, the entity does not adjust the transaction
price for any changes in the fair value of the
consideration
consideration.
m If the fair value of the non-cash consideration
promised by a customer varies for reasons other
than only the form of the consideration, apply
the guidance on variable consideration and the
constraint when determining the transaction
price.

Consideration payable to a customer

Is the consideration payable to a customer a payment for a distinct good Yes Account for the consideration as a
or service from the customer? reduction of the transaction price.

No

Does the consideration exceed the fair value of the distinct goods or Yes Account for the excess as a reduction of
services that the entity receives from the customer? the transaction price.

No

Account for the purchase of the good or service in the same way that
the entity accounts for other purchases from suppliers.

Step 4: Allocating the transaction price to performance obligations

Allocate the transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis except for
m allocating discounts, and
m allocating variable consideration
Determining The stand-alone selling price is the price at which an entity would sell a promised good or service separately to a customer.
stand-alone The best evidence of a stand-alone selling price is - the observable price of a good or service when the entity sells
selling price that good or service separately in similar circumstances and to similar customers.
Suitable methods for estimating the stand-alone selling price of a good or service include, but are not limited to, the following:
(a) Adjusted market assessment approach
(b) Expected cost plus a margin approach
(c) Residual approach
A combination of methods may need to be used to estimate the stand-alone selling prices of the goods or services promised in the
contract if two or more of those goods or services have highly variable or uncertain stand-alone selling prices.

26 May 2019 The Chartered Accountant Student

21
 FINANCIAL REPORTING
Allocation of aAllocate a discount proportionately to all performance obligations in the contract on the basis of the relative stand-alone selling
discount prices of the underlying distinct goods or services.
When to Allocate a discount entirely to one or more, but not all, performance obligations in the contract if all of the following
allocate criteria are met:
discount to (a) the entity regularly sells each distinct good or service (or each bundle of distinct goods or services) in the contract on a
‘less than all’ stand-alone basis;
performance (b) the entity also regularly sells on a stand-alone basis a bundle (or bundles) of some of those distinct goods or services at a
obligations? discount to the stand-alone selling prices of the goods or services in each bundle; and
(c) the discount attributable to each bundle of goods or services described in (b) above is substantially the same as the
discount in the contract and an analysis of the goods or services in each bundle provides observable evidence of the
performance obligation (or performance obligations) to which the entire discount in the contract belongs.
Note: – As a first step, always allocate the discount entirely to one or more performance obligations in the contract (if
applicable), and then as a second step, use the residual approach to estimate the stand-alone selling price of a good or service.
Allocation Variable consideration may be attributable to (1) the entire contract or (2) a specific part of the contract, such as either of
of variable the following:
consideration (a) one or more, but not all, performance obligations in the contract.
(b) one or more, but not all, distinct goods or services promised in a series of distinct goods or services that forms part of a
single performance obligation.
How to Allocate a variable amount (and subsequent changes to that amount) entirely to a performance obligation or to a distinct
allocate good or service that forms part of a single performance obligation if both of the following criteria are met:
variable m the terms of a variable payment relate specifically to the entity’s efforts to satisfy the performance obligation or transfer
consideration? the distinct good or service (or to a specific outcome from satisfying the performance obligation or transferring the
distinct good or service); and
m allocating the variable amount of consideration entirely to the performance obligation or the distinct good or service
when considering all of the performance obligations and payment terms in the contract.

STEP 5: Satisfying performance obligation Transfer of control at a point in time

Where a company does not meet any of the criteria for recognising
Transfer of Satisfaction of Revenue revenue over a period of time, then revenue shall be recognised at a
control performance recognition point in time.
obligation achieved

Transfer of control over a period of time

Legal title
Does customer
control the asset
as it is created or Yes
enhanced?
Entity has
No present right Physical
to payment possession
Indicators
Does customer of control
receive and consume Yes
the benefits as the
transfer
entity performs? Does entity have
the enforceable
No right to receive
payment for work
to date? Yes Customer
Does asset have an
Customer has
No Yes acceptance significant
alternative use to risk and
the entity? rewards

Yes

Control is transferred
Control is over time
transferred at a No
point in time

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22
FINANCIAL REPORTING
Service Concession Arrangements
Repurchase agreements
Does the grantor
control or regulate what
Forward: Call option: Put option: services the operator
must provide with the
An entity's An entity's right An entity's infrastructure, to whom
obligation to to repurchase the obligation to it must provide them,
repurchase the asset. repurchase and at what price? No
asset. the asset at OUTSIDE THE
the customer's Yes SCOPE OF
request. APPENDIX SEE
INFORMATION
NOTE 2
Does the grantor control, No
through ownership,
beneficial entitlement or
otherwise, any significant
residual interest in
Contract Cost the infrastructure at
the end of the service
arrangements? Or is the No
infrastructure used in
the arrangements for the
entire useful life?
Contract Contract
acquisition fulfilment
Yes

Incremental Cost to fulfil (i.e. Is the infrastructure Is the

costs to obtain perform/deliver) a constructed or infrastructure
a contract that contract. Consider acquired by the No existing
would not deferral under Ind operator from a infrastructure
be incurred AS 115.95 only if not third party for the of the grantor to
if contract covered in scope of purpose of the service which the operator
not obtained. another standard. arrangement? is given access?
(Eg. Sales
commission)
Yes Yes

Recognise as an asset
Recognise as under this standard if WITHIN THE SCOPE OF
an asset the costs: APPENDEIX
incremental
costs to obtain Operator does not recognise
a contract that All infrastructure as property, plant and
are expected to equipment or as a leased asset
be recovered.

Directly relate
to a contract (or
anticipated contract),
such as direct labour Does the Does the
and materials, indirect operator operator
costs of production, have a have a
etc. contractual contractual OUTSIDE
right to right to THE
receive cash No charge users No SCOPE OF
or other of the public APPENDIX
financial services as SEE
asset from or described in PARAGRAPH
Generate or enhance at direction paragraph 27 OF
resources that will of the 17 of APPENDIX
be used to satisfy grantor as Appendix?
performance described in
obligations in the paragraph 16
future, AND of Appendix?

Yes Yes

Operator recognises a Operator recognises

Expect to be recovered.
financial asset to the extent
that it has a contractual
right to receive cash or
another financial asset as
described in paragraph 16
of Appendix.
an intangible asset to
the extent that has a
contractual right to
receive an intangible asset
as described in paragraph
17 in Appendix.

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FINANCIAL REPORTING
Final (new course) Paper 1 - Financial Reporting: A Capsule for Quick Revision
In a pursuit to provide quality academic inputs to the students to help them in grasping the intricate aspects of the subject,
the Board of studies bring forth a crisp and concise capsule on Final new course Paper 1: Financial Reporting. This capsule
is third in the series of capsules on paper on Financial Reporting.
The syllabus of this paper covers almost all Indian Accounting Standards. Many of the Ind AS have already been covered
in the capsules on Financial Reporting published in July, 2018 and May, 2019 issues of this Journal. Therefore, for a
comprehensive revision of the Ind AS, students should also refer to these capsules along with the amendments notified
after their release, if any.
In this capsule we have covered Ind AS 20, 105, 41, 24 and 33. Significant provisions of these Ind AS have been presented
through pictorial/tabular presentations for better understanding and quick revision.
Students are advised to refer the study material or bare text of these Ind AS for comprehensive study and revision. Under
no circumstances, does this capsule substitute the detailed study of the material provided by the Board of Studies. Further,
students are advised to enhance their ability to address the issues and solve the problems based on Ind AS by working out
the examples, illustrations and questions given in the study material, revision test papers and mock test papers.

Indian Accounting Standard (Ind AS) 20 :

Accounting for Government Grants and Disclosure of Government Assistance

Overview of Ind AS 20

Government Grants Government Assistance Disclosure

Recognition of Government Presentation of Repayment of

Grants Government Grants Government Grants

Reasonable assurance for

receipt and compliance Related to asset Related to income

Non-monetary Presented in balance Presented as part of

government grants sheet by setting up profit or loss, either
grant as deferred separately or under
income 'other income'

Alternatively, deduct Alternatively,

the grant in arriving deducted in
at the carrying reporting related
amount of the asset expense

Scope

Applicable Not applicable

(a) To special problems arising in accounting for government grants reflecting the effects of
In accounting for In disclosure of changing prices or supplementary information of a similar nature.
(b) To government assistance that is provided for an entity in the form of benefits that are
available in determining taxable profit or tax loss, or are determined or limited on the basis of
income tax liability.
Examples: Income tax holidays, investment tax credits, accelerated depreciation.
Government grants Other forms of (c) To government participation in the ownership of the entity.
government assistance (d) To government grants covered by Ind AS 41, Agriculture.

06 August 2019 The Chartered Accountant Student

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 FINANCIAL REPORTING
Entity will comply with the conditions of the grant
Only when
Recognition
of government
there is
reasonable
+
grant
assurance that Grant will be received

Note:

S. Non-monetary government grants

Type Treatment
No.
1. Grant whether received Same manner of accounting is followed
in cash or as a reduction for all grants
of a liability to the
government
2. Forgivable loan from Treated as a government grant when Either Or
government there is reasonable assurance that the
entity will meet the terms for forgiveness
of the loan
3. Government loan at a • Treat the benefit as a government
below-market rate of grant Assess the fair value of the Record both
interest • Recognise and measure in accordance non-monetary asset and asset and grant
with Ind AS 109. account for both grant at a nominal
Benefit = and asset at that fair value amount
Initial carrying value of the loan
determined as per Ind AS 109 - the
proceeds received
4. Grants received as part • Identify the conditions giving rise to
of a package of financial costs and expenses which determine
or fiscal aids with the periods over which the grant will be
conditions attached earned.
• It may be appropriate to allocate part Presentation of government grant
of a grant on one basis and part on
another.
5. Grant receivable as • Recognise in profit or loss of the
compensation for period in which it becomes receivable
expenses or losses • Provide disclosure to ensure that its
already incurred or for effect is clearly understood.
immediate financial Related to assets Related to income
support with no future
related costs
6. Government Assistance • Government assistance to entities meets
– No Specific relation the definition of government grants in
to Operating Activities Ind AS 20
• Do not credit directly to shareholders’ Either present Or deduct the Present as Alternatively,
interests. Recognise in profit or loss on in balance sheet grant in arriving part of profit deduct in
a systematic basis. by setting up at the carrying or loss, either reporting
7. Government assistance- Exclude from the definition of grant as deferred amount of the separately or related
with no reasonable government grants income asset under 'other expense
value income'
8. Transactions with Exclude from the definition of
government government grants
Basic principle for recognition of government grant- Government
grants should be recognised in profit or loss on a systematic basis
over the periods in which the entity recognises as expenses the
related costs for which the grants are intended to compensate.

First applied towards any unapplied deferred credit and

then charged to profit and loss account immediately
Related to income

* Recognise by increasing the carrying amount of the asset

* The cumulative additional depreciation that would have been
Repayment of recognised in profit or loss to date in the absence of the grant
government Either shall be recognised immediately in profit or loss
grant * Check the possible impairment of the new carrying amount of
the asset
Related to assets

Or
Reduce the deferred income balance by the amount payable

The Chartered Accountant Student August 2019 07

25
FINANCIAL REPORTING
Indian Accounting Standard (Ind AS) 105 : Non-current Assets Held for Sale and
Discontinued Operations
Scope out -
Objective Measurement
Accounting provisions
for assets Deferred tax assets Criteria for Measurement Presentation
held for sale - Ind AS 12 classifying Presentation
of assets and
Financial Assets existing and
Presentation classified as Disclosure of
- Ind AS 109 assets as held Disclosure of
and disclosure held for sale Non-current
Agriculture for sale Discontinued
of asset held asset held for
- Ind AS 41 sale Operations
for sale and Contractual rights
discontinued - Ind AS 104
operations Employee benefits
- Ind AS 19

Objective Classification Measurement and Presentation

Measurement = at the lower of carrying amount and fair
Accounting for value - costs to sell
non-current
assets held for
sale or disposal Cessation of depreciation on such assets
groups
Ind AS 105 Presented separately in the balance sheet

Discontinued Results of discontinued operations to be presented

operations separately in the statement of profit and loss

Disclosure

Measurement provisions of Ind AS 105 do not apply to

Deferred tax Assets arising from Non-current Assets

Assets Financial Assets Contractual rights
Employee benefits which are measured under Insurance
at Fair value less cost contracts
to sell
Ind AS 12 Ind AS 19 Ind AS 109

Ind AS 41 Ind AS 104

Note: 5. Measurement requirements of this Ind AS apply to

1. Assets classified as non-current (as per Ind AS 1),
shall not be reclassified as current assets until they
meet the criteria to be classified as held for sale as
per Ind AS 105.
2. Non-current assets acquired exclusively for resale shall
not be classified as current unless they meet the criteria
to be classified as held for sale as per Ind AS 105.
3. Disposal group may be a group of cash-generating
units, a single cash-generating unit, or part of a
cash-generating unit.
4. The group may include any assets and any liabilities
of the entity, including current assets, current
liabilities and assets excluded from the measurement
requirements of this Ind AS.
the group as a whole, so that the group is measured
at the lower of its carrying amount and fair value
less costs to sell.
6. The classification, presentation and measurement
requirements in this Ind AS are applicable to
both non-current asset (or disposal group) that is
classified as:
• held for sale; and
• held for distribution to owners.
7. This Ind AS specifies the disclosures required in
respect of non-current assets (or disposal groups)
classified as held for sale or discontinued
operations. Disclosures in other Ind ASs do not
apply to such assets.

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 FINANCIAL REPORTING
Classification of non-current assets (or disposal groups) as held for sale or held for distribution to owners

An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will
be recovered principally through a sale transaction rather than through continuing use

Available for In its present condition

immediate Sale*/
distribution
Management is committed to a plan to sell/
distribute the asset

Key requirements for

non-current assets An active programme to locate a buyer and
held for sale or held for complete the plan/distribution has been initiated
distribution to owners
Asset is actively marketed for sale at a price
that is reasonable in relation to its current fair
value***
Sale/distribution must
be highly probable Sale/distribution should be expected to qualify
for recognition as a completed sale/distribution
within one year from the date of classification**

It is unlikely that significant changes to the

plan will be made for completion of plan/sale/
distribution or plan/distribution should not
be withdrawn

* Sale transactions include exchanges of non-current assets for Measurement of non-current assets (or disposal
other non-current assets when the exchange has commercial groups) classified as held for sale
substance

**If the entity remains committed to its plan to sell the asset Fair value less
(or disposal group), events or circumstances beyond the costs to sell
Value of
entity’s control may extend the period to complete the sale non-current
beyond one year asset (or
Lower of disposal
***Not applicable for non-current assets held for distribution Carrying both group)
to owners amount classified as
held for sale

Note: Note:
If the asset (or disposal group) is acquired as part of a business
S. No. Particular Details
combination, it shall be measured at fair value less costs to sell.

1. Acquisition of non- Classify the non-current Fair value

current asset (or asset (or disposal group) as less costs to
disposal group) with held for sale subject to the distribute* Value of non-
current asset
intention to subsequent conditions specified in the (or disposal
sale within a year above chart Lower of group)
Carrying both classified
2. Non-current assets that It shall not be classified amount as held for
are to be abandoned as held for sale since its distribution to
owners
carrying amount will be
recovered principally
*Costs to distribute are the incremental costs directly
through continuing use
attributable to the distribution, excluding finance costs and
and not from sale
income tax expense.

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27
FINANCIAL REPORTING
Recognition of impairment losses and reversals
• An entity shall recognise an impairment loss for any
initial or subsequent write-down of the asset (or
disposal group) to fair value less costs to sell.
• An entity shall recognise a gain for any subsequent
increase in fair value less costs to sell of an asset to
the extent of the cumulative impairment loss that has
been recognised previously
• An entity shall not depreciate (or amortise) a non-
current asset while it is classified as held for sale or while
it is part of a disposal group classified as held for sale.
• Interest and other expenses attributable to the
liabilities of a disposal group classified as held for sale
shall continue to be recognised.
Changes to a plan of sale or to a plan of distribution
to owners
• If an asset (or disposal group) classified as held for sale
or as held for distribution to owners previously, no
longer meets the criteria for such classification, then
it shall be ceased to classify as the asset (or disposal
group) held for sale or held for distribution to owners
(respectively).
• If an entity reclassifies an asset (or disposal group)
directly from being held for sale to being held for
distribution to owners, or directly from being held for
distribution to owners to being held for sale, then the
change in classification is considered a continuation
of the original plan of disposal.
• The entity shall not change the date of classification.

Measurement in case of above changes

Carrying amount before

the asset was classified as
held for sale/distribution to
owners, adjusted for any
depreciation, amortisation
or revaluations that would
have been recognised
Any required
had the asset (or disposal adjustment to
Value of a
group) not been classified non-current the carrying
as held for sale or as held asset (or amount of a
Lower of for distribution to owners. disposal non-current
group) on asset shall be
reclassification in profit or loss
from continuing
operations

Its recoverable amount at

the date of the subsequent
decision not to sell or
distribute.

Presentation and Disclosure of a non-current asset (or disposal group) classified as held for sale

• Present a non-current asset classified as held for sale separately from other
assets in the balance sheet.
• Present the liabilities of a disposal group classified as held for sale separately
from other liabilities in the balance sheet. Those assets and liabilities should not
be offset and presented as a single amount.
• Separate disclosure is required for major classes of assets and liabilities
classified as held for sale.
Presentation • Present separately any cumulative income or expense recognised in OCI
relating to such non-current asset classified as held for sale.
• Comparative amounts are not reclassified or re-presented to reflect the
classification in the balance sheet for the latest period presented.
• Any gain or loss on the remeasurement does not meet the definition of a discontinued
operation shall be included in profit or loss from continuing operations.

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 FINANCIAL REPORTING

• Description of the non-current asset (or disposal group)

• Description of facts and circumstances of the sale, or leading to the expected
disposal and the expected manner and timing of that disposal
• Gain or loss recognised and if not presented separately on the face of the income
Disclosure statement, the caption in the income statement that includes that gain or loss
• The reportable segment in which the non-current asset (or disposal group) is
presented, if any
• If there is a change of plan to sell, a description of facts and circumstances leading to
the decision and its effect on results

Discontinued operations
represents
a separate
major line of
business or
A component of geographical
an entity* operations; or
that has
Discontinued
either been operations
disposed of is a subsidiary is part of a single
acquired co-ordinated
exclusively with plan to dispose of
or classified as a separate major
a view to
held for sale resale; or line of business
or geographical
operations

* A component of an entity will have been a cash-generating unit or a group of cash-generating units while being held for use

Presentation and Disclosure of Discontinued Operations

S. No. Particulars Detail disclosure
1. Separate ■ Presentation and disclosure shall enable users of the financial statements to evaluate the financial
presentation effects of discontinued operations and disposals of non-current assets (or disposal groups)
■ This allows the user to distinguish between continuing operations and those which will not
2. In the ■ Disclose a single amount comprising the total of:
statement of (a) the post-tax profit or loss of discontinued operations; and
profit and (b) the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the
loss disposal of the assets or disposal group(s) constituting the discontinued operation.
■ Disclose the analysis of this single amount into:
(a) the revenue, expenses and pre-tax profit or loss of discontinued operations;
(b) the related income tax expense as required in Ind AS 12;
(c) the gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the
assets or disposal group(s) constituting the discontinued operation; and
(d) the related income tax expense as required in Ind AS 12
■ Present the analysis in the notes or in the statement of profit and loss
■ Disclosure of analysis is not required for disposal groups that are newly acquired subsidiaries that meet
the criteria to be classified as held for sale on acquisition
■ Disclose the amount of income from continuing operations and from discontinued operations
attributable to owners of the parent. These disclosures may be presented either in the notes or in the
statement of profit and loss
3. In the ■ Disclose the net cash flows attributable to the operating, investing and financing activities of discontinued
statement of operations either in the notes or in the financial statements
cash flows ■ These disclosures are not required for disposal groups that are newly acquired subsidiaries that meet
the criteria to be classified as held for sale on acquisition
■ Comparative figures for prior periods are also re-presented
4. Adjustment Adjustments in the current period to amounts previously presented in discontinued operations that
to prior are directly related to the disposal of a discontinued operation in a prior period should be classified
period separately in discontinued operations. The nature and amount of such adjustments are disclosed.
disposals

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FINANCIAL REPORTING
Indian Accounting Standard 41: Agriculture

Scope of Ind AS 41

Non-Applicability
Applicability

Land related to agricultural activity

(Ind AS 16 and Ind AS 40)

Agricultural produce Government grants as Bearer plants related to agricultural

Biological assets
at the point of harvest defined in Ind AS 20 activity (Ind AS 16)

Government grants related to bearer

When they relate to plants (Ind AS 20)
Living animal or plant
agricultural activity

Intangible assets related to

Produce growing on agricultural activity (Ind AS 38)
bearer plant

Right-of-use assets arising from a lease of

land related to agricultural activity
(Ind AS 116)

The table below provides examples of biological assets,

Note: agricultural produce, and products that are the result of
processing after harvest:
1. This Standard is applied to agricultural produce, which
Biological assets Agricultural Products that
is the harvested produce of the entity’s biological assets, produce are the result of
at the point of harvest. Thereafter, Ind AS 2 or another processing after
harvest
applicable Ind AS is applied. Hence, Ind AS 41 does not
deal with the processing of agricultural produce after Sheep Wool Yarn, carpet
harvest. Trees in a timber Felled Trees Logs, lumber
plantation
2. Ind AS 41 does not apply to Bearer plants but applies to Dairy Cattle Milk Cheese
the produce on those bearer plants.
Pigs Carcass Sausages, cured
hams
The following are NOT bearer plants:
Cotton plants Harvested cotton Thread, clothing
(a) Plants cultivated to be harvested as agricultural
produce (for example, trees grown for use as lumber); Sugarcane Harvested cane Sugar
Tobacco plants Picked leaves Cured tobacco
(b) Plants cultivated to produce agricultural produce
when there is more than a remote likelihood that Tea bushes Picked leaves Tea
the entity will also harvest and sell the plant as Grape vines Picked grapes Wine
agricultural produce, other than as incidental Fruit trees Picked fruit Processed fruit
scrap sales (for example, trees that are cultivated Rubber trees Harvested latex Rubber products
both for their fruit and their lumber); and
(c) Annual crops (for example, maize and wheat). Note:
3. Bearer plants no longer used to bear produce are still Some plants, for example, tea bushes, grape vines, oil palms
and rubber trees, usually meet the definition of a bearer plant
considered as bearer plant even when they might be cut
and are within the scope of Ind AS 16. However, the produce
down and sold as scrap. growing on bearer plants, for example, tea leaves, grapes, oil
palm fruit and latex, is within the scope of Ind AS 41.

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 FINANCIAL REPORTING

Agricultural biological into agricultural

activity is the transformation produce
management by
an entity of for sale or for
conversion
harvest of
biological assets
Features into additional
biological assets

Capability to change - Living animals/plants are capable of biological transformation

Management of change - Management facilitates biological transformation by enhancing,

or at least stabilising, conditions necessary for the process to take place (for example,
nutrient levels, moisture, temperature, fertility, and light)

Measurement of change - The change in quality (for example, genetic merit, density,
ripeness, fat cover, protein content, and fibre strength) or quantity (for example, progeny,
weight, cubic metres, fibre length or diameter, and number of buds) brought about
by biological transformation or harvest is measured and monitored as a routine
management function

Note: Harvesting from unmanaged sources (such as ocean fishing and deforestation) is not agricultural activity.

Biological Assets
Biological Transformation
Recognition Measurement
(when and only when)
is a processes of (causing qualitative
or quantitative changes in a biological
asset) the it is the fair initial at the end
entity probable value or recognition of each
controls that future cost of reporting
the economic the asset period
Growth Degeneration Production Procreation asset as benefits can be
a result associated measured
of past with the reliably
events asset will at its fair value less
An increase A decrease in Of flow to the costs to sell
in quantity or the quantity or agricultural Creation of entity
improvement deterioration produce such additional
in quality of in quality of as latex, tea living animals Exception
an animal or an animal or leaf, wool, and or plants
plant plant mik

This presumption can be rebutted only on initial recognition for a

Bearer plant It is a living plant that:
(a) is used in the production or supply of
agricultural produce;
(b) is expected to bear produce for more than
one period; and
(c) has a remote likelihood of being sold as
agricultural produce, except for incidental
scrap sales
Harvest It is the detachment of produce from
a biological asset or the cessation of a
biological asset’s life processes
biological asset when
a. quoted market prices are not available and
b. alternative fair value measurements determined are clearly unreliable.
In such a case, it shall be measured at its cost less any accumulated
depreciation and any accumulated impairment losses.
Note: Once the fair value of such a biological asset becomes reliably
measurable, an entity shall measure it at its fair value less costs to sell.
Note:
Once a non-current biological asset meets the criteria to be
classified as held for sale (or is included in a disposal group that is
classified as held for sale) as per Ind AS 105, it is presumed that fair
value can be measured reliably.

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FINANCIAL REPORTING
Gain or Loss
Agricultural harvested is measured
produce from an at its fair
entity’s value less
biological costs to sell at From biological asset From agricultural produce
assets the point of
harvest

Change in fair Gain or loss

Gain or loss
value less costs on initial
on initial
Important points: to sell on the recognition
recognition
1. Entities often enter into contracts to sell their biological reporting date
assets or agricultural produce at a future date. Generally,
contract prices are not relevant in measuring the fair value.
2. The fair value of a biological asset or agricultural produce
is not adjusted because of the existence of a contract.
3. There may be no separate market for biological assets A loss A gain may Eg. A gain or
that are attached to the land but an active market may may arise arise on loss may arise on
exist for the combined assets, that is, the biological because reproduction initial recognition
assets, raw land, and land improvements, as a package. costs to or generation of agricultural
An entity may use information regarding the combined sell are like when a produce as a result
assets to measure the fair value of the biological assets. deducted in calf is born of harvesting
(For example, the fair value of raw land and land determining
improvements may be deducted from the fair value of the fair value
combined assets to arrive at the fair value of biological less costs
assets.) to sell of a
biological
4. An entity once measured a biological asset at its fair asset
value less costs to sell has to continue to measure the
biological asset at its fair value less costs to sell until
disposal.
5. Ind AS 41 assumes that the fair value of agricultural
produce at the point of harvest can always be measured Taken to Profit or Loss for the
reliably. period in which it arises

Government Grant for

Biological Asset

Measured at Fair value

less cost to sell Measured at Cost

When the grant is When the grant is Recognise as per Ind

conditional unconditional AS 20

Recognise the government Recognise the government

grant in Profit and Loss Account grant in Profit and Loss Account
when the condition attaching when it becomes receivable
to it are met

For disclosure, refer paragraphs 40-57 of bare text of Ind AS 41.

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 FINANCIAL REPORTING
Indian Accounting Standard (Ind AS) 24 - Related Party Disclosures
Objective, Related Party (RP) Scope of Ind AS 24
Scope and
Purpose of
related party Related party
disclosures transactions The Standard has to be applied in:
Overview of
Ind AS 24
Identification Party that are not
of related Identifying related party relationships

Identifying related party transactions

Irrespective of RP
transactions Identifying outstanding balances between an
entity and its related parties
Only when there is
Disclosures RP transactions
Identifying commitments between an entity and
its related parties
Exemption from
disclosures to
Government related Identifying the circumstances in which
entitites
disclosures of above items are to be made

Determining the disclosures to be made about

Objective of Ind AS 24 the above items

To ensure that the
financial statements
contain necessary
disclosures with respect to
Disclosures
To draw attention to the
possibility that financial
position and profit or loss
may have been affected by Disclosures not
Disclosures are to be
made in required when

Individual financial It would conflict

statements with the reporting
Related party relationships entity’s duties of
confidentiality
Consolidated and
separate financial
Related party transactions statements

Entity is prohibited
by the statute,
Outstanding balances Intra-group related regulator or
with related parties party transactions similar competent
and outstanding authority to
balances are disclose certain
eliminated in information
Commitments with preparation of CFS
related parties

Exception:
If above items (occurred between investment
entity and subsidiaries) are measured at FVTPL,
then not eliminated

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FINANCIAL REPORTING
Purpose of Related Party Disclosures
It is probable that related party relationship may have an effect
on the profit or loss and financial position of an entity. The
effect gets manifested through:

(a) Transactions that

are entered between Example : An entity may sell goods
related parties may to its parent at cost. It may not sell
not be entered with goods at cost to an unrelated party.
unrelated parties

Example : S Limited, a subsidiary of H

Limited, in steel manufacturing used
(b) Transactions with to purchase billets from UR Limited.
unrelated parties get H Limited acquires 100% stake in FS
influenced because Limited who also manufactures billets.
of related party FS Limited is now a fellow subsidiary
of S Limited. H Limited instructs S
relationships
Limited not to purchase billets from
UR Limited but from FS Limited.

Determining related party of reporting entity

Person(s) Another Entity(ies)

It they are members of the same group

who has who has who is a
control or joint significant member of the
control over influence over key management One entity is an associate or joint venture of the other
the reporting the reporting personnel of entity or of a member of a group of which the other
entity entity entity is a member

the reporting Both entities are joint ventures of the same third party
entity or

One entity is a joint venture of a third entity and the

a parent of other entity is an associate of the third entity
the reporting
entity
The entity is a post-employment benefit plan for the
benefit of employees of either the reporting entity or an
entity related to the reporting entity

If the reporting entity is itself such a plan, the sponsoring

employers are also related to the reporting entity

The entity is controlled or jointly controlled by a person if

they are members of the same group

A related person has significant influence over the

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

The entity, or any member of a group of which it is a

part, provides key management personnel services to the
reporting entity or to the parent of the reporting entity

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 FINANCIAL REPORTING
Important definitions:
Control Power over the investee when it is exposed or has rights to variable returns from its involvement with the
investee and has the ability to affect those returns
Joint Control Contractually agreed sharing of control of an arrangement which exists only when decisions about the
relevant activities require the unanimous consent of the parties sharing control
Significant Power to participate in the financial and operating policy decisions of the investee, but is not control of those
influence policies
Key management Persons having authority and responsibility for planning, directing and controlling the activities of the
personnel (KMP) entity, directly or indirectly, including any director (whether executive or otherwise) of that entity
Close members Close members of the family of a person are those family members who may be expected to influence, or
of the family of a be influenced by, that person in their dealings with the entity including:
person (a) that person’s children, spouse or domestic partner, brother, sister, father and mother;
(b) children of that person’s spouse or domestic partner; and
(c) dependants of that person or that person’s spouse or domestic partner.

Unrelated Parties

- Providers of finance, - Customer,

Two entities
- If a director or other
member of KMP is
common between them
Two Joint venturers - Trade unions, - Supplier,
- If they simply share - Public utilities, - Franchisor,
joint control of JV - Departments and - Distributor or
 agencies of government - General agent doing significant
business

By virtue of their normal dealing with entity, although they may:

Affect the freedom of action of an entity Participate in its decision-making process

Disclosure

Mandatory disclosure of relationship, where Disclosure required only when there are related
control exists between a parent and its subsidiaries party transactions

Disclosures are must even when there are Compensation to key Related party
no related party transactions management personnel transactions during
- In total the year
- And for each category of:
Disclosures:
- Name of its parent and, if different, the
ultimate controlling party
- Nature of related party relationship
Short-term Post- Other Termination Share-
employee employment long-term benefits based
Disclosure requirements here are in addition benefits benefits benefits payment
to Ind AS 27 and Ind AS 112

(a) The nature of At minimum, disclosures include: Disclosures shall be made Provision of key
the related party (a) Amount of transactions separately for each of the management
relationship (b) Amount of outstanding following categories: personnel services
(b) Information balances, including (a) The parent that are provided
about: commitments, and: (b) Entities with joint control by separate
- Related party - Their terms and conditions of, or significant influence management
transactions (including secured/unsecured over, the entity
- outstanding and nature of consideration (c) Subsidiaries
balances paid in settlement) (d) Associates
including - Guarantees given or received (e) Joint ventures in which the
commitments (c) Provisions for doubtful debts entity is a joint venturer
(d) Expense recognized during (f ) Key management personnel
the period in respect of bad or of the entity or its parent
doubtful debts (g) Other related parties

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FINANCIAL REPORTING
Following are examples of transactions that are disclosed if they are with a related party

a Transfers under finance arrangements (including loans and

Purchases or sales of goods (finished or unfinished) g equity contributions in cash or in kind);

b Purchases or sales of property and other assets h Provision of guarantees or collateral

c Rendering or receiving of services Commitments to do something if a particular event occurs or

i does not occur in the future, including executory contracts
(as per Ind AS 37) (recognised and unrecognised)
d Leases

Settlement of liabilities on behalf of the entity or by the entity

e Transfers of research and development j on behalf of that related party

f Transfers under licence agreements k Management contracts including for deputation of employees

Note:
• A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of
whether a price is charged.
• If an entity obtains key management personnel services from another entity (the ‘management entity’), the entity is not required to apply the
requirements to the compensation paid or payable by the management entity to the management entity’s employees or directors.
• Related party transactions of a similar nature may be disclosed in aggregate by type of related party except when separate disclosure is
necessary.
• Disclosures that related party transactions were made on terms equivalent to those that prevail in arm’s length transactions are made only if
such terms can be substantiated.
• Participation by a parent or subsidiary in a defined benefit plan that shares risks between group entities is a transaction between related
parties.

Disclosure requirements for Government-related entities

Reporting entity is exempt from the disclosure If a reporting entity applies the exemption, it
requirements in relation to shall disclose the following about
(i) Related party transactions (i) The transactions and
(ii) Outstanding balances and (ii) Related outstanding balances
(iii) Commitments with

A government Another entity (that is a The name of Government

that has control, related party) because same
joint control government has control, joint
or significant control or significant influence
influence over the over both the reporting entity Nature of the government’s relationship
reporting entity and the other entity with the entity (Whether it has control, joint
control or significant influence over the entity)

Sufficient detail of related party transactions:

For each individually significant transaction: For other transactions that are collectively significant
-Its Nature -Its Amount -A qualitative or quantitative indication of their extent

Reporting entity shall consider the closeness of the related party relationship and other factors relevant in establishing the
level of significance of the transaction such as whether it is:

(a) Significant (b) Carried (c) Outside (d) Disclosed (e) Reported (f ) Subject to
in terms of out on non- normal to regulatory to senior shareholder
size market terms day-to-day or supervisory management approval
business authorities
operations

Note:
• Government refers to government, government agencies and similar bodies whether local, national or international.
• A government-related entity is an entity that is controlled, jointly controlled or significantly influenced by a government.

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 FINANCIAL REPORTING
INDIAN ACCOUNTING STANDARD (IND AS) 33 - EARNINGS PER SHARE

Overview of Ind AS 33

Measurement Presentation Disclosure

Basic EPS Diluted EPS

Earnings Shares Earnings Shares

Weighted Average Number

Effect of
preference of Shares
dividend Base for calculation

Deciding the date for issue

Effect of of shares
Calculation of weighted average to be
Cumulative and done independently for every period
non-cumulative
preference Change in the number of
dividend shares without change in
value of capital Shares of subsidiary, joint venture or
associate
Early conversion
of Preference
shares at Dilutive potential ordinary shares
premium

Antidilutive potential ordinary shares

Effect of
discounts, Options, warrants and their equivalents
premiums related
to preference
shares Employee stock options

Early Convertible instruments

conversion
of Preference
shares at Contingently issuable shares
premium

Contingently issuable potential ordinary

shares

Contracts that may be settled in ordinary

shares or cash

Purchased options

Written put options

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FINANCIAL REPORTING
Objective of Ind AS 33 *Treatment of after-tax amount of preference
dividend in calculation of Basic EPS
To prescribe principles
for

Nature of Other adjustments to

Determination of Presentation of preference Profit or loss attributable
earnings per share earnings per share shares to the parent

To improve performance comparisons Non-cumulative Cumulative

between

Different entities in the Different reporting periods Deduct Deduct When When In case of
same reporting period for the same entity after-tax after-tax preference preference an early
amount of amount of shares are shares are conversion
preference preference issued at repurchased of
Scope of Ind AS 33 dividend of dividend discount or under an convertible
the period from Profit premium entity’s preference
from Profit and Loss, to provide tender shares
Apply to companies that have issued ordinary shares and Loss whether or for a low or offer to the
(equity shares in Indian context) only when not dividend high initial holders
declared is declared dividend
Entity that discloses EPS shall calculate and disclose respectively
EPS in accordance with this Ind AS 33 to
compensate
When an entity is required to present both an entity for
consolidated financial statements and separate Any original issue selling the
financial statements then discount or premium preference
on increasing rate shares at a
preference shares is discount or
Disclosure required by this An entity shall present EPS in amortised to retained
Standard shall be presented CFS based on the information premium
earnings using the (referred as
in both consolidated financial given in CFS only. effective interest
statements (CFS) and increasing
Similarly, EPS in SFS should method and treated as a rate
separate financial statements be based on the information preference dividend
(SFS) separately preference
given in SFS only. shares)

Important Points: Return to the

• Ordinary shares participate in profit for the period only after other preference
types of shares such as preference shares have participated. shareholders
• An entity may have more than one class of ordinary shares. Fair value
(charge to retained of the Carrying
• Ordinary shares of the same class have the same rights to earnings) deducted amount
receive dividends. consideration
in calculating profit paid to the of the
or loss attributable preference preference
Measurement of basic earnings per share (Basic EPS) to ordinary equity shareholders shares
holders of the parent
Basic Earnings Profit/Loss attributable to Equity share holders entity
Per Share = Weighted average number of Equity shares
outstanding during the period

Measurement of Earnings for Basic EPS

Return to the Fair value of Fair value of
different shareholders the ordinary the ordinary
Profit or loss from continuing operations attributable to the is deducted in shares or other shares
parent entity is adjusted for: calculating profit consideration issuable under
or loss attributable paid at the time the original
After-tax amounts of preference dividends*
to ordinary equity of conversion conversion
holders of the parent terms
Differences arising on the settlement of entity
preference shares

Other similar effects of preference shares

which are classified as equity
Any item of income or expense which is otherwise
required to be recognized in profit or loss in
accordance with Ind AS is debited or credited to
securities premium account/other reserves
Note:
The amount of preference dividends for the period does not
include the amount of any preference dividends for cumulative
preference shares paid or declared during the current period in
respect of previous periods.

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Weighted average number of shares (For calculation of Basic EPS)
For the purpose of calculating basic earnings per share, the number of
ordinary shares shall be the weighted average number of ordinary shares
outstanding during the period.
Weighted average number of equity shares:
Ordinary shares outstanding at the beginning xxxx
Less: Ordinary shares bought back multiplied by time-
weighting factor* xxxx
Add: Ordinary shares issued multiplied by time-
weighting factor * xxxx
Ordinary shares outstanding during the period xxxx
*The time-weighting factor is the number of days that the shares are
outstanding as a proportion of the total number of days in the period.
FINANCIAL REPORTING
Important points:
1. Contingently issuable shares are treated as outstanding and are
included in the calculation of basic earnings per share only from the
date when all necessary conditions are satisfied (i.e. the events have
occurred).
2. Shares that are issuable solely after the passage of time are not
contingently issuable shares, because the passage of time is a
certainty.
3. Outstanding ordinary shares that are contingently returnable (i.e.
subject to recall) are not treated as outstanding and are excluded
from the calculation of basic earnings per share until the date the
shares are no longer subject to recall.
Where,
Contingently issuable ordinary shares are ordinary shares issuable for
little or no cash or other consideration upon the satisfaction of specified
conditions in a contingent share agreement.

Change in the weighted average number of shares (increase or

Deciding the date for reduction) without a corresponding change in value of capital
issue of shares

Shares are usually included in the weighted average number

of shares from the date consideration is receivable (which is
generally the date of their issue), for example: Capitalization A bonus A reverse
A share split element in any
or bonus issue share split
other issue, (consolidation
for example, of shares)
a bonus
Ordinary shares element in a
are included in the The number of ordinary shares rights issue
Situation of issuance of outstanding is increased to existing
ordinary shares weighted average without an increase in resources
number of shares from shareholders
i.e. without any additional
the date consideration.
It reduces the
number of ordinary
When issued in exchange When cash is Refer shares outstanding
for cash receivable Rights without a
The date in that case will be Issues corresponding
considered from the beginning reduction in
When issued on voluntary of the earliest period presented resources
When dividends are
reinvestment of dividends (on
reinvested
ordinary or preference shares)

When issued as a result

of conversion of a debt
instrument to ordinary shares
Issued in place of interest or
principal on other financial
instruments
When Interest
ceases to accrue However, when the overall effect
is a share repurchase at fair value,
the reduction in the number of
ordinary shares outstanding is
When Interest the result of a corresponding
ceases to accrue reduction in resources

Issued in exchange for the Rights issues

settlement of a liability
Issued as consideration for the
acquisition of an asset other
than cash
On settlement date
When the acquired
asset is recognised
The rights shares can either be offered at the current market price or at a
price that is below the current market price. The notional capitalization
issue reflects the bonus element inherent in the rights issue and is
measured by the following fraction:

Fair value per share immediately before the exercise of rights

Issued for rendering of services When the services
to the entity Theoretical ex-rights fair value per share
are rendered
where,
Issued as a part of the
From the date of Theoretical ex-rights fair value per share:
consideration transferred in a
acquisition
business combination
Fair value of all outstanding shares before exercise of right + Total
amount received from exercise of rights
Issued upon the conversion From the date of
of a mandatorily convertible entering into the No. of shares outstanding after the exercise of the rights
instrument contract

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FINANCIAL REPORTING
Dilution It is a reduction in earnings per share or
an increase in loss per share resulting from
the assumption that convertible instruments
are converted, that options or warrants are
exercised, or that ordinary shares are issued upon
the satisfaction of specified conditions.
Antidilution It is an increase in earnings per share or a
reduction in loss per share resulting from
the assumption that convertible instruments
are converted, that options or warrants are
exercised, or that ordinary shares are issued upon
the satisfaction of specified conditions.
Potential It is a financial instrument or other contract
ordinary share that may entitle its holder to ordinary shares.
Examples of potential ordinary shares are:
(a) financial liabilities or equity instruments,
including preference shares, that are convertible
into ordinary shares
(b) options and warrants
(c) shares that would be issued upon the
satisfaction of conditions resulting from
contractual arrangements, such as the purchase
of a business or other assets.
The formula can be mathematically expressed as follows:
Profit/Loss attributable to Equity share holders
when dilutive potential shares are converted into
Diluted ordinary shares
EPS = Weighted average number of existing Equity shares
+ Weighted average number of dilutive potential
ordinary shares
Measurement of Earnings for Diluted EPS:
Basic earnings are adjusted for after-tax effect of changes
in Profit and Loss that result from conversion of all dilutive
potential ordinary shares.
Measurement of Earnings for Diluted EPS
Measurement of Earnings for Basic EPS, adjusted for, by the
after-tax effect of:
Add back any dividends or other items related
to dilutive potential ordinary shares
Add back any interest recognized in the period
related to dilutive potential ordinary shares
Add/Less any other changes in income or
expense that would result from the conversion
of the dilutive potential ordinary shares.
Note:
The expenses associated with potential ordinary shares include
transaction costs and discounts accounted for in accordance with
the effective interest method
Calculation of Shares for the purpose of calculating Diluted
EPS
Existing weighted average number of ordinary shares + Weighted
average number of ordinary shares that would be issued on the
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conversion of all the dilutive potential ordinary shares into
ordinary shares.
Important points to be considered:
• Potential ordinary shares are weighted for the period they
are outstanding
• All potential ordinary shares are assumed to be converted
into ordinary shares at the beginning of the period
• If not in existence at the beginning of the period, potential
ordinary shares are assumed to be converted into ordinary
shares at the date of its issuance.
• Potential ordinary shares shall be treated as dilutive
when, and only when, their conversion to ordinary shares
would decrease earnings per share or increase loss per
share from continuing operations.
• Potential ordinary shares that are converted into ordinary
shares during the period are included in the calculation
of diluted earnings per share from the beginning of
the period to the date of conversion; from the date of
conversion, the resulting ordinary shares are included
in both basic and diluted earnings per share.
Test for determining whether potential ordinary shares are
Dilutive or Antidilutive
Will EPS decrease or loss per share increase due to
conversion of potential ordinary shares
Yes No
Dilutive Antidilutive
Consider in Diluted EPS Ignore
Note:
• If potential ordinary shares of the subsidiary, joint venture
or associate have a dilutive effect on the basic earnings
per share of the reporting entity, they are included in the
calculation of diluted earnings per share
• Dilutive potential ordinary shares shall be determined
independently for each period presented
• In determining whether potential ordinary shares are
dilutive or antidilutive, each issue or series of potential
ordinary shares is considered separately rather than in
aggregate
• To maximise the dilution of basic earnings per share,
each issue or series of potential ordinary shares is
considered in sequence from the most dilutive to the
least dilutive, i.e. dilutive potential ordinary shares with
the lowest ‘earnings per incremental share’ are included
in the diluted earnings per share calculation before those
with a higher earnings per incremental share
• Options and warrants are generally included first because
they do not affect the numerator of the calculation
Options, warrants and their equivalents
Options, warrants and their equivalents are financial instruments
that give the holder the right to purchase ordinary shares.
 FINANCIAL REPORTING
Treatment of options, warrants and their equivalents Contracts that may be settled in ordinary shares or cash

Settlement of a contract at the entity’s option

If it is a contract to issue a
If it is a contract to issue Either Or
certain number of ordinary
remaining ordinary shares for
shares at their average market
no consideration
price during the period
Through ordinary shares Through cash

Shares are assumed to be fairly They generate no proceeds and

priced have no effect on profit or loss

In both cases, presume that the contract will be settled in

ordinary shares
These shares are neither
Such shares are dilutive
dilutive nor antidilutive

Check whether the effect is dilutive

Add to the number of ordinary

Ignore in the calculation of
shares outstanding in the
diluted earnings per share
calculation of Diluted EPS

Note: Yes No
• Options and warrants have a dilutive effect only when
the average market price of ordinary shares during
the period exceeds the exercise price of the options or
warrants (i.e. they are ‘in the money’). Consider in the
calculation of diluted Ignore
• Previously reported earnings per share are not retroactively EPS
adjusted to reflect changes in prices of ordinary shares.
• Employee share options with fixed or determinable terms
and non-vested ordinary shares are treated as options in Note:
the calculation of diluted earnings per share, even though
they may be contingent on vesting. They are treated as When an issued contract that may be settled in ordinary
outstanding on the grant date. shares or cash at the entity’s option may give rise to an asset
• Performance-based employee share options are treated or a liability, or a hybrid instrument with both an equity and a
as contingently issuable shares because their issue is liability component under Ind AS 32, the entity should adjust
contingent upon satisfying specified conditions in addition the numerator (profit or loss attributable to ordinary equity
to the passage of time. holders) for any changes in the profit or loss that would have
resulted during the period if the contract had been classified
Contingently issuable shares wholly as an equity instrument.
» Contingently issuable ordinary shares are ordinary shares
issuable for little or no cash or other consideration upon
Settlement of a contract at the holder’s option
the satisfaction of specified conditions in a contingent
share agreement.
» A contingent share agreement is an agreement to issue Either Or
shares that is dependent on the satisfaction of specified
conditions.
» In the calculation of basic earnings per share, Through ordinary shares Through cash
contingently issuable ordinary shares are treated as
outstanding and included in the calculation of diluted
earnings per share if the conditions are satisfied (i.e. the
events have occurred).
The more dilutive of following shall be considered in calculating
» Contingently issuable shares are included from the Diluted EPS
beginning of the period (or from the date of the
contingent share agreement, if later).
» If the conditions are not satisfied, the number of
contingently issuable shares included in the diluted
earnings per share calculation is based on the number of Cash settlement Share settlement
shares that would be issuable if the end of the period is
the end of the contingency period

The Chartered Accountant Student August 2019 23

41
FINANCIAL REPORTING
Purchased options
Presentation as per Ind AS 33
Contracts (i.e. options held by the entity on its own ordinary
shares)

Present in the statement of profit and loss basic and

diluted earnings per share for profit or loss from
continuing operations for each class of ordinary
shares

Purchased put options Purchased call options

Earnings per share is presented for every period for
which a statement of profit and loss is presented

If diluted earnings per share is reported for at

least one period, it shall be reported for all periods
Not included in the calculation of Diluted EPS (because presented
including them would be antidilutive)

If basic and diluted earnings per share are equal,

dual presentation can be accomplished in one line
Written put options in the statement of profit and loss.
Contracts that require the entity to repurchase its own shares,
such as written put options and forward purchase contracts, are
reflected in the calculation of diluted earnings per share if the An entity that reports a discontinued operation
effect is dilutive. shall disclose the basic and diluted amounts per
share for the discontinued operation either in the
statement of profit and loss or in the notes
Incremental ordinary Number of Number of
shares shall be ordinary ordinary shares
included in the shares received from An entity shall present basic and diluted earnings per
calculation of diluted assumed to satisfying the share, even if the amounts are negative (i.e. a loss per
earnings per share be issued contract share)

Retrospective adjustments
Disclosure as per Ind AS 33
If the number of ordinary or potential ordinary
shares are outstanding

Numerators - amounts used in calculating basic and

Increases as a result of
a capitalisation, bonus
issue or share split
diluted earnings per share and reconciliation of the
amount used to profit or loss
Decreases as a result of a
reverse share split
Denominators - weighted average number of
ordinary shares used in calculating basic and diluted
earnings per share and a reconciliation of these
denominators to each other

Calculation of basic and diluted earnings per share for all

periods presented shall be adjusted retrospectively.
Note:
1. Basic and diluted earnings per share of all periods presented
shall be adjusted for the effects of errors and adjustments
resulting from changes in accounting policies accounted for
retrospectively.
2. An entity does not restate diluted earnings per share of any
prior period presented for changes in the assumptions used
in earnings per share calculations or for the conversion of
potential ordinary shares into ordinary shares.
Instruments (including contingently issuable
shares) that could potentially dilute basic earnings
per share in the future, but were not included since
they are antidilutive for the period
Description of ordinary share transactions or
potential ordinary share transactions that occur
after the reporting period and that would have
changed significantly the number of ordinary shares
or potential ordinary shares outstanding at the end
of the period if those transactions had occurred
before the end of the reporting period

24 August 2019 The Chartered Accountant Student

42
FINANCIAL REPORTING
FINAL NEW COURSE PAPER 1- FINANCIAL REPORTING:
A CAPSULE FOR QUICK REVISION
In a pursuit to provide quality academic inputs to the students to help them in grasping the intricate aspects of the subject, the
Board of studies bring forth a crisp and concise capsule on Final new course Paper 1 : Financial Reporting.
The syllabus of this paper largely covers almost all Indian Accounting Standards. However, in this capsule we have focussed
only on ‘Asset based Ind AS’. Significant provisions of these Ind AS have been presented through pictorial/tabular presentations
for better understanding and quick revision.
Many of the standards contain certain exceptions. All the exceptions are not necessarily reflected in the charts/pictorial/table
given in the capsule. Hence, students are advised to refer the study material or bare text of these Ind AS for comprehensive study
and revision. Under no circumstances, this capsule substitute the detailed study of the material provided by the Board of Studies.
Further, students are advised to enhance their ability to address the issues and solve the problems based on Ind AS by working
out the examples, illustrations and questions given in the study material, revision test papers and mock test papers.

INDIAN ACCOUNTING STANDARD (IND AS) 2

Scope of Ind AS 2

Non-applicability of Ind AS 2

Financial instruments (Ind AS Biological assets (i.e. living animals or plants) Measurement of
32 and Ind AS 109) related to agricultural activity and agricultural inventories
produce at the point of harvest (Ind AS 41)

At NRV in accordance with well-established At fair value less costs to sell

practices in those industries for inventories held by

Producers of Agricultural produce Minerals and mineral Commodity

after harvest products broker-traders

Agricultural products Forest products Changes in fair

value less costs to
sell are recognised
in profit or loss in
Changes in NRV are recognised in profit or loss in the period
the period of the change

* NRV- Net Realisable Value

Definition of Inventories

Inventories are assets held

For sale in the ordinary course of In the process of production for In the form of materials or
business such sale supplies to be consumed in

It includes goods It includes finished goods Production process Rendering of services

purchased and held for produced, or work in
resale progress, or materials and
supplies awaiting use in the
production process

Costs incurred to fulfill a contract with a customer that do not

give rise to inventories are accounted for in accordance with
Ind AS 115

06 July 2018 The Chartered Accountant Student

 FINANCIAL REPORTING
Measurement of Inventories

Inventories are measured at the lower of

Cost of inventories NRV of inventories

Costs of purchase Costs of conversion Other costs

Purchase price Direct labour Overheads

Costs incurred
to bring the
inventories to
Import duties their present
and other taxes location and
(non-recoverable condition
from the taxing
authorities)
Fixed production Variable production
overheads (it overheads (It
remain relatively vary directly, or
constant regardless nearly directly, Borrowing Costs
Transport cost (Refer Ind AS 23)
of the volume of with the volume of
production) production)

Handling other
costs directly
attributable to If AP = NC,
the acquisition of
goods/services then Allocated fixed Estimated Estimated
O/H = Total fixed Selling Estimated cost cost
O/H price in the of completion necessary
ordinary to make the
course of sale
Trade discounts, business
rebates and other If AP < NC,
similar items
are deducted in then Allocated fixed
determining the O/H = AP x cost per
costs of purchase unit of fixed O/H
(based on NC)
NRV = Net Realisable Value
Expense recognised AP = Actual Production
in Profit or loss =
Total fixed O/H - NC = Normal Capacity
Allocated fixed O/H O/H = Overhead

If AP > NC,

then Allocated fixed

O/H = Total fixed
O/H

Costs excluded from the cost of inventories and recognised as expenses

• Abnormal amounts of wasted materials, labour or other production costs.

• Storage costs (If those costs are not necessary in the production process before a further production stage).
• Administrative overheads that do not contribute to bringing inventories to their present location and condition.
• Selling costs.
• Interest expenses (financial element in deferred settlement terms).  

The Chartered Accountant Student July 2018 07

FINANCIAL REPORTING
Allocation of cost to joint products and by-products

When more than one product is produced

in the process

The outcome is Main product

The outcome is Joint products
with a By-product

When the cost of When the cost of

When the by-product is When the by-product is
conversion is separately conversion is not
immaterial material
identifiable separately identifiable

Cost of each product is Allocation of cost is By-product is measured By-product is treated

based on the separate based on relative sales at NRV and this value is as joint product
cost incurred. value of each product deducted from the cost of and accordingly the
either at the stage in the the main product. accounting is done.
production process when
the products become
separately identifiable,
or at the completion of
production.

Cost Formulas

Inventory Valuation
Techniques

Inventory ordinarily Inventory not ordinarily

interchangeable interchangeable

Historical Cost Methods Non Historical Cost Methods

Specific Identification
Method
(generally used in
jewellery and tailor
made industries)
Retail Inventory / Adjusted Standard Cost
FIFO selling price method Method

It takes into account

normal levels of (and
It is used when large
are reviewed regularly)
numbers of rapidly changing
Weighted Average
items with similar margins
are involved Materials

Supplies

Cost is determined by reducing the Labour efficiency

sales value of the inventory by the
appropriate percentage gross margin
Capacity utilisation

08 July 2018 The Chartered Accountant Student

 FINANCIAL REPORTING
Material and other supplies held for use in
the production of inventory

When finished goods are sold When finished goods are

at or above cost sold at NRV

Raw material is measured Raw material is measured at

at cost replacement cost measured as NRV

Important points of Ind AS 2 to be remembered Disclosure

NRV It is an entity specific value
Inventories comprising They are measured on initial recognition
agricultural produce at their fair value less costs to sell at the
that an entity has point of harvest. Inventories carried
harvested from its at fair value less costs
to sell
biological assets
New assessment of  A new assessment is made of NRV in  Amount of
Analysis of inventories
NRV each subsequent period.
carrying recognised as
 When the circumstances that amount an expense
previously caused inventories to be during the
written down below cost no longer period
 Amount of any
exist or when there is clear evidence
write-down
of an increase in NRV, the amount of of inventories
the write-down is reversed (i.e. the recognised as
reversal is limited to the amount of an expense
 The amount
the original write-down)
Sale of inventories The financial of any reversal
 When inventories are sold, the Accounting of any write-
statements
carrying amount of those inventories policies shall disclose down
shall be recognised as an expense in  The
the period the sale is recognised. circumstances
or events that
 If NRV is less than cost, then the led to the
difference and all losses of inventories reversal of a
shall be recognised as an expense in write-down
that period.
 When in later year, if NRV increases The carrying amount
then difference to the extent of cost of inventories pledged
shall be recognised as a reduction in as security for liabilities
the amount of inventories recognised
as an expense in the period in which
the reversal occurs.

30 Hours training on GST for the students of Intermediate/IPCC and Final

Board of Studies and Indirect Taxes Committee are jointly organizing 30 hours (10 days X 3 hours per
day) training course on GST Laws for the students of Intermediate/IPCC and Final (Old & New) Course
through Virtual mode. The training course has been designed to teach the students the theoretical and
practical aspects of GST Law so as to increase their employability in the job market.
The 30 hours sessions of Live Webcast will be held on weekends i.e. from 14th July to 12th August, 2018.
The announcement with complete schedule of sessions date wise has been uploaded on the Institute’s
website at link: https://resource.cdn.icai.org/50617bos40341.pdf
Students may register and make online payment at link: http://ccm.icai.org/?progid=1895
On successful completion of course, the students will be able to download participation certificate in soft
form.
Director, Board of Studies

The Chartered Accountant Student July 2018 09

FINANCIAL REPORTING

INDIAN ACCOUNTING STANDARD (IND AS) 16 : PROPERTY, PLANT AND EQUIPMENT

PPE and its Recognition

PPE are tangible items that

Are held for use Are expected to be used during more than one period

In the production or supply of goods or services

For rental to others

For administrative purposes

Its cost is recognised if, and only if (both)

It is probable that future economic benefits associated The cost of the item can be
with the item will flow to the entity measured reliably

Recognition of Initial costs Recognition of Subsequent costs

Even if the item of PPE Day-to-day cost Parts of some items Regular major
is not directly increasing (including cost of of PPE replaced at inspections
the future benefits but is small parts) regular intervals
necessary for an entity to
obtain future economic
benefits from its other
assets

Such an asset is reviewed
for impairment as per
Ind AS 36
Recognised in
profit or loss as Recognised in the
incurred carrying amount of
PPE (if recognisation
criteria is met)
Carrying cost of those
replaced parts/ previous
inspection (as the case may
be) is derecognised

10 July 2018 The Chartered Accountant Student

 FINANCIAL REPORTING

Measurement of PPE (or an item of PPE)

at recognition

No
Recognised to Profit Does it qualify for recognition as an asset?
and Loss

Yes

Shall be measured at its cost which includes

Directly attributable costs Intitial estimates of the costs of

Purchase price dismantling & removing the items
and restoring the site

Is the cost incurred when the

Costs of employee benefits (as
Add: item is acquired or cost incurred
defined in Ind AS 19) arising
Import duties and non- for using the PPE during a
directly from the construction
refundable purchase taxes particular period?
or acquisition of the item of PPE

Costs of site preparation

Yes No

Subtract:
Trade discounts and Initial delivery and handling
rebates costs Capitalised
Capitalised to
the cost of PPE to the cost of
Installation and assembly costs  inventory

Net cost of testing whether the

asset is functioning properly
Also recognised and measured
as provision as per Ind AS 37
Professional fees

Note: Measurement of Cost

1. Items such as spare parts, stand-by equipment and servicing
equipment are recognised when they meet the definition of PPE. Payment deferred beyond normal credit terms
Otherwise, such items are classified as inventory.
2. Recognition of costs in the carrying amount of an item of PPE
ceases when the item is in the location and condition necessary
No Yes
for it to be capable of operating in the manner intended by Is payment
management. deferred
3. Costs incurred in using or redeploying an item are not included beyond the
in the carrying amount of that item. normal credit
terms?
4. Incidental operations that are not necessary to bring an item
to the location and condition necessary for it to be capable of Cost of PPE
operating in the manner intended by management, the income is cash price
and related expenses such incidental operations are recognised equivalent at the
recognition date
in profit or loss and included in their respective classifications of
income and expense. Total Less Cash price
Payment equivalent
5. The cost of a self-constructed asset is determined using the
same principles as for an acquired asset. Any internal profits
are eliminated in arriving at such costs. Similarly, the cost of =
abnormal amounts of wasted material, labour, or other resources Interest over the
incurred in self-constructing an asset is not included in the cost period of credit
of the asset.
6. Bearer plants are accounted for in the same way as self-
constructed items of PPE. Either charged to Profit
or Loss or capitalised
as per Ind AS 23

The Chartered Accountant Student July 2018 11

FINANCIAL REPORTING
Exchange of Assets

Entity

Measured at
Asset acquired/received Asset given up

Yes Whether exchange No

transaction has
commercial substance
Or
the fair value
is reliably
measurable?

An item of PPE is measured

Yes No
at the carrying amount of
Whether F.V. of
asset received is
the asset given up
clearly evident?

An item of PPE is measured An item of PPE is measured

at F.V. of asset received at F.V. of asset given up

Measurement after recognition Frequency of revaluation

as an Accounting policy

Either Or Yes No
Whether the F.V.
of a revalued asset Revalue
Annual the item
differs materially
Cost Model Revaluation Model revaluation only every
from its carrying
is required 3 or 5
amount?
years
An item of PPE is carried at

No Whether
F.V. On applying revaluation model – the asset is treated in one of
can be the following ways:
Cost measured
Either Or
reliably?
Less • The gross carrying amount may be The accumu-
restated by reference to observable market lated depreci-
Accumulated Yes data or it may be restated proportionately to ation is elimi-
depreciation the change in the carrying amount. nated against
An item of PPE is carried at • The accumulated depreciation at the date the gross car-
Less of the revaluation is adjusted to equal the rying amount
difference between the gross carrying amount of the asset.
Accumulated and the carrying amount of the asset after
impairment loss taking into account accumulated impairment
losses.
The amount of the adjustment of accumulated depreciation
forms part of the increase or decrease in carrying amount that is
Revalued accounted for.
Any Any
amount Less subsequent Less subsequent Note:
being F.V. at accumulated accumulated 1. If an item of property, plant and equipment is revalued, the
the date of depreciation impairment entire class of property, plant and equipment to which that asset
revaluation loss belongs shall be revalued.
2. Here a class of property, plant and equipment is a grouping of
assets of a similar nature and use in an entity’s operations.
12 July 2018 The Chartered Accountant Student
 FINANCIAL REPORTING
Treatment of revaluation gain or loss

First time revaluation Subsequent revaluation

Increase in the carrying amount Decrease in the carrying amount Increase in CA of the
Decrease in CA of the revalued asset
(CA) of the revalued asset (CA) of the revalued asset revalued asset

Recognise the revaluation Was there a previous Was there a previous

Recognise the increase in CA of the decrease in CA of the
revaluation gain in OCI loss in P & L Yes No
revalued asset? revalued asset?

No Yes
Recognise the Recognise the
revaluation gain revaluation loss
Recognise the Recognise the
in OCI in P & L
revaluation gain in revaluation loss in
P & L to the extent OCI to the extent of
that it reverses a any credit balance
revaluation decrease existing in the
of the same asset revaluation surplus in
previously recognised respect of that asset.
in P & L

Remaining increase to Remaining decrease to

be recognised in OCI be recognised in P & L

Note:
1. The revaluation surplus included in equity in respect of an item Particular Treatment
of property, plant and equipment may be transferred directly 7 Revision in  The residual value and the useful life of an
to retained earnings when the asset is derecognised. This may residual value asset shall be reviewed annually.
involve transferring the whole of the surplus when the asset is and the useful life  The change(s) in depreciation on account
retired or disposed of. of an asset of revision, if any, shall be accounted for as
2. Some of the surplus may be transferred as the asset is used by a change in an accounting estimate as per
an entity. In such a case, the amount of the surplus transferred Ind AS 8
would be the difference between depreciation based on the
revalued carrying amount of the asset and depreciation based on 8 Land and  Land and buildings are separable assets
the asset’s original cost. Buildings and are accounted for separately, even
3. Transfers from revaluation surplus to retained earnings are not when they are acquired together.
made through profit or loss.  Land has an unlimited useful life and is
not depreciated.
Depreciation = (Cost of the Asset -Residual value)/Useful life of  Buildings have a limited useful life and are
depreciated.
the asset  An increase in the value of the land on
Particular Treatment which a building stands does not affect the
determination of the depreciable amount
1 If the cost is Separate depreciation is computed for each of the building.
significant in item of PPE.  If the cost of land includes the costs of site
relation to total dismantlement, removal and restoration,
then that portion of the land asset is
cost of PPE
depreciated over the period of benefits
obtained by incurring those costs.
2 PPE given as an Depreciate separately amounts reflected in  In some cases, the land itself may have
operating lease the cost of that item that are attributable to a limited useful life, in which case it is
favourable or unfavourable lease terms relative depreciated in a manner that reflects the
to market terms. benefits to be derived from it.
9 Depreciation  The depreciation method applied shall be
3 Grouping of If more than one significant parts of an item method reviewed annually.
items of PPE have similar useful life and depreciation  If there has been a significant change in
method then such parts may be grouped in the expected pattern of consumption of
determining the depreciation charge. the future economic benefits embodied
in the asset, the method shall be changed
4 Remainder If an entity has varying expectations for such
to reflect the changed pattern otherwise
insignificant parts, approximation techniques may be used the method is applied consistently from
parts of the item to depreciate the remainder in a manner that period to period.
of PPE faithfully represents the consumption pattern  Such a change shall be accounted for as a
and/or useful life of its parts. change in an accounting estimate as per
Ind AS 8.
5 Commencement Depreciation of an asset begins when it is
of depreciation available for use. 10 Impairment Apply Ind AS 36, Impairment of Assets.
11 Compensation Compensation from third parties for items
6 Treatment of The depreciation charge for each period shall for impairment of PPE that were impaired, lost or given up
depreciation be recognised in profit or loss if not included in shall be included in profit or loss when the
charge the carrying amount of another asset. compensation becomes receivable.

The Chartered Accountant Student July 2018 13

FINANCIAL REPORTING
Factors determining the Useful Life of an Asset Depreciation Method
Expected physical Technical or commercial •Straight-line depreciation
wear and tear obsolescence results in a constant charge
• Depends on the • Arising from changes Straight-line over the useful life if the
number of shifts for or improvements in method asset’s residual value does
which the asset is to production, or not change
be used or • From a change in the
• The repair and market demand for the
maintenance product or
programme, or • Service output of the
• The care and asset.
maintenance of the • The diminishing balance
asset while idle. Diminishing method results in a
balance decreasing charge over
method the useful life

Factors Legal or similar

determining the limits on the use of
useful life of an the asset Units of • The units of production
Expected usage asset method results in a charge
of the asset • i.e. the expiry production
dates of related method based on the expected use
leases or output

Derecognition of PPE
Depreciation Period
On disposal
Derecognition of carrying
amount of an item PPE

When no future economic

Asset unused benefits are expected from
Fair Value Repair and its use or disposal.
> Carrying Residual or held for sale The gain or loss arising
or included in a maintenance of from the derecognition of
Amount (If Value > = an asset
Residual Carrying disposal group an item of property, plant
Value is less Amount that is classified and equipment shall be
than Carrying as held for sale included in profit or loss
Amount)

Gains shall not be classified

Depreciation is Depreciation Depreciation Depreciation is as revenue.
charged is zero ceases recognised
For disclosure requirement, students are advised to refer the study
material.

INDIAN ACCOUNTING STANDARD (IND AS) 17 : LEASES

Scope

Scope of Ind AS 17

Applicable to Not applicable to

Agreements that Leases to explore for or
transfer the right to use use minerals, oil, natural
assets gas and similar non-
regenerative resources
Licensing agreements for Agreements that are
such items as motion picture As the basis of contracts for services that do
films, video recordings, plays, measurement for not transfer the right to use
manuscripts, patents and assets from one contracting
copyrights party to the other

Even though substantial

Property held by lessees that is
services by the lessor may
accounted for as investment property
be called for in connection
with the operation or
maintenance of such assets
Investment property provided by
lessors under operating leases

Biological assets (dealt in Ind AS 41)

held by lessees under finance leases

Biological assets (dealt in Ind AS

41) provided by lessors under
operating leases

14 July 2018 The Chartered Accountant Student

 FINANCIAL REPORTING
On the date of inception of the lease Net Gross Discounted at the
investment investment interest rate implicit
A lease is
classified Date of inception of lease is the earlier of in the lease in the lease in the lease
as either an
operating or a
finance lease; Date of
the lease Commencement of the lease term
agreement Unearned Gross Net
If finance lease,
then on this Date from Date of finance investment investment
date amounts Date of which the initial income in the lease in the lease
to be recognised commitment lessee is recognition
at the by the entitled to of the lease
commencement parties to exercise its
of the lease the principal right to use the
provisions of leased asset.
term are
determined. the lease. Classification of Leases
Classification of leases
Definition
Depends on the
Minimum lease payments substance rather form
of the contract

For a Lessee
Finance lease Operating lease

Payments Costs for Taxes to be It transfers substantially It does not transfer

made by Contingent services paid by and
rent all the risks and rewards substantially all the
the lessee paid by and reimbursed incidental to ownership risks and rewards
over the reimbursed to the lessor incidental to ownership.
lease term to the lessor

Risk Reward
Any amounts guaranteed by the lessee or by a party
related to the lessee

Possibilities of Expectation of
losses from idle profitable operation
Any residual value guaranteed by a capacity over the asset’s life
third party unrelated to the lessor that
is financially capable of discharging the
obligations under the guarantee. Technological Gain from the
obsolescence appreciation in value
For a Lessor of the asset’s residual
value
Variations in
Note:
return because of
If the lessee has an option to purchase the asset at a price that is
changing economic
expected to be sufficiently lower than fair value at the date the option
conditions
becomes exercisable for it to be reasonably certain, at the inception
of the lease, that the option will be exercised, the minimum lease
payments comprise the minimum payments payable over the lease
term to the expected date of exercise of this purchase option and the Primary indicators of a Financial Lease
payment required to exercise it.
The lease transfers ownership of the asset to the lessee by the
end of the lease term
Economic life Period over which the asset is
expected to be usable (by anyone)
The lessee has the option to purchase the asset at a price
lower than the fair value at the date the option becomes
Useful life Remaining period over exercisable
which the economic benefits of the
asset are expected to be used by the
lessee
The lease term is for the major part of the economic life of
the asset even if title is not transferred

At the inception of the lease the present value of the

minimum lease payments amounts to at least substantially
Minimum Unguaranteed all of the fair value of the leased asset
lease payments Gross
residual value investment in
receivable by the accruing to the
lessor under a the lease
lessor The leased assets are of such a specialised nature that only the
finance lease,
lessee can use them without major modifications

The Chartered Accountant Student July 2018 15

FINANCIAL REPORTING
Additional Indicators of a Financial Lease 2. Subsequent Measurement
a. Minimum lease payments are apportioned
between the finance charge and the
Lessee has the ability
to continue the lease reduction of the outstanding liability.
for a secondary
Gains or losses from b. The finance charge is allocated to each
the fluctuation in period at a rent
the fair value of the that is substantially period during the lease term so as to produce
If the lessee can lower than market
residual accrue to a constant periodic rate of interest on the
cancel the lease, the lessee rent
the lessor’s losses remaining balance of the liability.
associated with the c. Contingent rents are recognised as expenses
cancellation are
borne by the lessee in the periods in which they are incurred.
d. A finance lease gives rise to depreciation
expense for depreciable assets as well as
Note:
1. Lease classification is made at the inception of the lease. finance expense for each accounting period.
2. If at any time the lessee and the lessor agree to change the e. If there is reasonable certainty that the lessee
provisions of the lease, other than by renewing the lease, that will obtain ownership by the end of the lease
would have result in a different classification of the lease, the term, the period of expected use is the useful
revised agreement is regarded as a new agreement over its term.
life of the asset to which it is depreciated.
However, changes in estimates or changes in circumstances,
do not give rise to a new classification of a lease for accounting f. If there is no reasonable certainty that the
purposes. lessee will obtain ownership by the end
of the lease term, the asset shall be fully
Leases of Land and Buildings depreciated over the shorter of the lease
1. When a lease includes both land and buildings elements, an
term and its useful life.
entity assesses the classification of each element as a finance
or an operating lease separately. In determining whether the B. 1. Lease payments (excluding costs for services
land element is an operating or a finance lease, an important Accounting such as insurance and maintenance) under
consideration is that land normally has an indefinite economic
by Lessees an operating lease shall be recognised as an
life.
2. Whenever necessary in order to classify and account for a lease of in case of expense on a straight-line basis, even if the
land and buildings, the minimum lease payments (including any Operating payments are not on that basis, over the lease
lump-sum upfront payments) are allocated between the land and Leases term.
the buildings elements in proportion to the relative fair values of 2. If another systematic basis is more
the leasehold interests in the land element and buildings element
representative of the time pattern of the
of the lease at the inception of the lease.
3. If the lease payments cannot be allocated reliably between these user’s benefit (even if the payments to the
two elements, the entire lease is classified as a finance lease if lessors are not on that basis), then operating
both elements are not classified as operating leases. lease shall be recognised as an expense on
4. For a lease of land and buildings in which the amount that would that other systematic basis.
initially be recognised for the land element is immaterial, the land
3. If the payments to the lessor are structured
and buildings may be treated as a single unit for the purpose of
lease classification and classified as a finance or operating lease. to increase in line with expected general
In such a case, the economic life of the buildings is regarded as inflation to compensate for the lessor’s
the economic life of the entire leased asset. expected inflationary cost increases, then
operating lease shall be recognised as an
Leases in the financial statements of lessees expense on that structured basis.
A. 1. Initial Recognition Leases in the financial statements of lessors
Accounting In Balance Sheet recognise :
 leased asset as an asset and A. Initial Recognition
by Lessees
 obligation to pay future rentals as a liability. Accounting a. Lessors shall recognise assets held under
in case of Amount to recognise : and a finance lease in their balance sheets and
Finance Lower of
Disclosure present them as a receivable at an amount
Leases  fair value of the leased asset
 the present value of the Minimum Lease by Lessors equal to the net investment in the lease.
Payments. in case of b. For finance leases other than those involving
Note: Finance manufacturer or dealer lessors, initial direct
1. Any initial direct costs of the lessee are Leases costs are included in the initial measurement
added to the amount recognised as an asset.
of the finance lease receivable and reduce the
2. The liabilities for leased assets should not
be presented in the financial statements as a amount of income recognised over the lease
deduction from the leased assets. term.

16 July 2018 The Chartered Accountant Student

 FINANCIAL REPORTING
Subsequent measurement Sale and Leaseback Transaction
a. Lease payments relating to the period,
Sale
excluding costs for services, are applied
against the gross investment in the lease to Seller / Lessee Buyer / Lessor
reduce both the principal and the unearned
finance income.
b. Estimated unguaranteed residual values
are reviewed regularly. If there has been a Leaseback:
reduction in the estimated unguaranteed Finance leaseback
Operating leaseback
residual value, the income allocation over
the lease term is revised and any reduction
in respect of amounts accrued is recognised Finance Leaseback
immediately.
Accounting by Manufacturer and Dealer
Lessor
a. Manufacturer or dealer lessors shall Defer and amortise profit over lease term
Gain on sale
recognise selling profit or loss in the period,
in accordance with the policy followed by
the entity for outright sales. Loss on sale Loss not recognised, but subject to
impairment in accordance with Ind AS 36.
b. If artificially low rates of interest are quoted,
selling profit shall be restricted to that which
would apply if a market rate of interest were
charged.
c. Costs incurred by manufacturer or dealer
Operating Leaseback
lessors in connection with negotiating and
arranging a lease shall be recognised as an
expense when the selling profit is recognised. Sale Price = Fair Value Recognise profit or loss immediately
B.  Lease income from operating leases
Accounting (excluding amounts for services such
by Lessors as insurance and maintenance) shall be
Profit or Loss not recognised, but lease is
in case of recognised in income on a straight-line basis Sale Price > Fair Value subject to impairment in accordance with
Operating Ind AS 36.
over the lease term.
Leases  If another systematic basis is more
representative of the time pattern of the Sale Price < Fair Value
user’s benefit (even if the payments to the and in case of loss, not
compensated by future Recognise profit or loss immediately
lessors are not on that basis), then operating lease payments at below
lease shall be recognised as an income on market price
that other systematic basis.
 If the payments to the lessor are structured
Sale Price < Fair Value Deferred and amortised the profit
to increase in line with expected general and in case of loss, or loss in proportion to the lease
inflation to compensate for the lessor’s compensated by future payments over the period for which the
lease payments at below asset is expected to be used
expected inflationary cost increases, then market price
operating lease shall be recognised as
anincome on that structured basis.
 Costs, including depreciation, incurred in If Fair value < Carrying
amount of the asset Recognise loss immediately i.e. =
earning the lease income are recognised as Carrying amount - Fair Value
an expense.
 Initial direct costs incurred by lessors in
negotiating and arranging an operating lease
shall be added to the carrying amount of the
leased asset and recognised as an expense For disclosures in the books of Lessee and Lessor for finance or
operating lease, refer the study material.
over the lease term on the same basis as the
lease income.

The Chartered Accountant Student July 2018 17

FINANCIAL REPORTING
INDIAN ACCOUNTING STANDARD (IND AS) 23 : BORROWING COSTS

Are interest Acquisition of a

and other qualifying asset
Form part of If are directly
costs
the cost of attributable
incurred for
that asset to the Construction of
borrowing of
Borrowing funds a qualifying asset
costs
Production of a
Other Recognised In the period in which qualifying asset
borrowing as an it is incurred
costs expense

Borrowing Costs includes

Qualifying asset Includes Excludes
Interest Calculated using the effective interest
method as described in Ind AS 109 • that • inventories • Assets ready
expense necessarily • manufacturing for their
takes a plants intended use
Finance charges substantial • power or sale, when
in respect of Recognised in accordance with period of generation acquired.
finance leases Ind AS 17 time to get facilities • Financial
ready for its • intangible assets, and
Recognised to the intended use assets inventories
Exchange differences extent that they or sale • investment that are
arising from foreign are regarded as an properties manufactured,
currency borrowings adjustment to interest • bearer plants or otherwise
costs produced, over
a short period
of time
Note:
With regard to exchange difference required to be treated as
borrowing costs:
• The adjustment amount should be equivalent to the exchange Borrowing Actual borrowing Investment income
loss not exceeding the difference between the cost of borrowing costs costs incurred on on the temporary
in functional currency vis-a-vis the cost of borrowing in a foreign investment of
eligible for that borrowing
currency. those borrowings,
• The realised or unrealised gain to the extent of the unrealised capitalisation during the period
exchange loss previously recognised as an adjustment should if any.
also be recognised as an adjustment to interest.

Calculation of Borrowing Cost

Borrowing cost on funds Borrowing cost on funds borrowed for general use but applied
borrowed for specific use on qualifying asset

Expenditure incurred on Step 1 : Calculate Capitalisation Rate (CR)*

QA** x Interest rate on
such specific borrowings
Step 2 : Calculation of Borrowing cost to be capitalised
Expenditure incurred on QA x Capitalisation rate

Total Borrowing Cost

*CR =
**QA =
Weighted average borrowing costs on outstanding borrowings of the entity (excluding specific borrowing costs) Qualifying Asset
Total outstanding borrowings of the entity during the period (excluding specific borrowings)
Note:
1. The amount of borrowing costs that an entity capitalises during a period shall not exceed the amount of borrowing costs it incurred during
that period.
2. In some circumstances, it is appropriate to include all borrowings of the parent and its subsidiaries when computing a weighted average
of the borrowing costs; in other circumstances, it is appropriate for each subsidiary to use a weighted average of the borrowing costs
applicable to its own borrowings.

18 July 2018 The Chartered Accountant Student

 FINANCIAL REPORTING
It incurs POINTS TO REMEMBER:
expenditures for
the asset Particular Detail
1 Suspension of • It is done when active development of a
Starts from capitalisation qualifying asset is suspended.
the date when It incurs • Suspension is not done when an entity carries
Commencement the entity first borrowing costs out substantial technical and administrative
of capitalisation meets all of work.
the following It undertakes • An entity does not suspend capitalising
conditions: activities that borrowing costs when a temporary delay is a
are necessary to necessary part of the process of getting an asset
prepare the asset ready for its intended use or sale.
for its intended use 2 Cessation of • When substantially all the activities necessary
or sale. capitalisation to prepare the qualifying asset for its intended
Note: use or sale are complete.
• An asset is normally ready for its intended
Expenditures on a qualifying asset include only those use or sale when the physical construction
expenditures that have resulted in of the asset is complete even though routine
administrative work might still continue.
• payments of cash,
3 When • If each part is capable of being used while
• transfers of other assets or
construction of construction continues on other parts, the
• the assumption of interest-bearing liabilities.
qualifying asset entity shall cease capitalising borrowing costs
Expenditures are reduced by is completed in when it completes substantially all the activities
• any progress payments received and parts necessary to prepare that part for its intended
• grants received in connection with the asset use or sale.

INDIAN ACCOUNTING STANDARD (IND AS) 36 : IMPAIRMENT OF ASSETS

Subsidiaries, as
Important definitions:
per Ind AS 110 Cash- • It is the smallest identifiable group of assets
It generating • This group of asset generates cash inflows that are largely
includes
All assets Financial unit independent of the cash inflows from other assets or
other assets groups of assets
than non- Associates, as
classified Corporate They are assets other than goodwill that contribute to the
applicable per Ind AS 28
Applicable as assets future cash flows of both the cash-generating unit under
assets review and other cash-generating units.
(as listed Costs of Costs of disposal are incremental costs directly attributable
below) Joint ventures, as disposal to the disposal of an asset or cash-generating unit, excluding
per Ind AS 111
finance costs and income tax expense.
Scope of Ind AS 36

Value in Value in use is the present value of the future cash flows
Assets that are carried at revalued use expected to be derived from an asset or cash-generating unit.
amount *

Impairment Carrying Recoverable

Inventories (Ind AS 2) Amount Amount
Loss

Contract assets (Ind AS 115)

Assessment of impairment shall be done annually of following
assets irrespective of whether there is any indication of impairment:
Deferred tax assets (Ind AS 12)

Assets arising from employees benefits (Ind AS 19)

Intangible Intangible Goodwill
asset acquired in
Biological Assets measured at fair value less with an asset a business
cost to sell (Ind AS 41) indefinite not yet combination
useful life available
Not
applicable for use
Deferred acquisition costs and intangible assets
arising from insurance contracts (Ind AS 104)

Non-current assets (or disposal groups) classified
as held for sale (Ind AS 105)
Financial Assets (within the scope of Ind AS 109)
*Note: If the disposal costs are not negligible, then the revalued asset will
be impaired if its value in use is less than its revalued amount.
Note:
1 The concept of materiality applies in identifying whether the
recoverable amount of an asset needs to be estimated.
2 If previous calculations show that an asset’s recoverable amount
is significantly greater than its carrying amount and no significant
event had occurred which will change the difference, there is no
need for annual assessment of impairment.
3 If indication of impairment exists than remaining useful life, the
depreciation (amortisation) method or the residual value for the
asset should be reviewed and adjusted, even if no impairment
loss is recognised for the asset.

The Chartered Accountant Student July 2018 19

FINANCIAL REPORTING
Indicators for impairment
External sources of information
Significant decline in market value (more than
normal decline)
Significant changes in technology, market,
economic or legal environment with adverse
effect on entity
Increase in market interest rates or rate of
returns
Carrying amount of net assets of entity is
more than its market capitalisation
Internal sources of information
Obsolescence or physical damage of an asset
Significant changes in use or expected use of
an asset with adverse effect on entity
Internal reporting indicating worse economic
performance of asset than expected
Dividend from a subsidiary, joint venture or
associate
Carrying amount of investment (in separate
financial statements) > Carrying amounts of
investee’s net assets (including associated
goodwill) in the consolidated financial
statements
Dividend > Total Comprehensive Income
of investee

Measurement of Recoverable Amount

Fair value less cost of disposal

Higher of Recoverable
Amount
both

Value in use

Circumstances in which it is not necessary to calculate both an asset’s fair value less costs of disposal and its value in use
1. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other
amount.
2. When fair value less costs of disposal would not be possible to be measured due to various reasons, the entity may use the asset’s value in
use as its recoverable amount.
3. In case of an asset held for disposal, the asset’s fair value less costs of disposal may be used as its recoverable amount.

Value in Use

Value in Use Sum of Year wise estimated future

cash flows
Applicable discount rate

Includes Excludes

It should be a pre-
Projections of cash inflows from the continuing use of the asset Future restructuring to which an tax rate (rates) that
entity is not yet committed reflect(s) current
market assessments of

Projections of cash outflows, which are necessarily incurred to Improving or enhancing the
generate the cash inflows from continuing use of the asset and asset’s performance Time value of
can be directly attributed to the asset money

Cash inflows or outflows from

financing activities Risks specific
Net cash flows, to be received/paid for the disposal of the asset at to the asset
the end of its useful life for which the
Income tax receipts or payments future cash flow
estimates have not
been adjusted
When an asset-specific rate
is not directly available from
the market, the entity uses
surrogates to estimate the
discount rates

Entity’s weighted average cost Entity’s incremental Other market

of capital borrowing rate borrowing rates

Note:
Future cash flows are estimated in the currency in which they will be generated and then discounted using a discount rate appropriate for that
currency. An entity translates the present value using the spot exchange rate at the date of the value in use calculation.

20 July 2018 The Chartered Accountant Student


Recognising and Measuring an Impairment S.No. Particular
Loss other than Goodwill B.
Impairment loss (IP)
No Whether asset is Yes
carried at revalued
amount?
Whether revaluation
No surplus exists?
Recognise IP
immediately in profit
or loss
Yes
C.
Recognise IP immediately
Recognise IP in OCI to the extent
in profit or loss to the of the amount in the revaluation
extent loss exceeds the surplus for that same asset
revaluation surplus, if any
Note:
1. Any impairment loss of a revalued asset (increased earlier) shall
be treated as a revaluation decrease as per other standard.
2. When the amount estimated for an impairment loss is greater
than the carrying amount of the asset to which it relates, an
entity shall recognise a liability, if required.
3. After the recognition of an impairment loss, the depreciation
(amortisation) charge for the asset shall be adjusted in future
periods to allocate the asset’s revised carrying amount, less its
residual value (if any), on a systematic basis over its remaining
useful life.
4. If an impairment loss is recognised, any related deferred tax
assets or liabilities are determined in accordance with Ind AS 12 D.
by comparing the revised carrying amount of the asset with its
tax base.
Recognition and Measurement of an Impairment
Loss for a Cash-generating Unit and Goodwill
S.No. Particular Guidance under Ind AS 36
A. Identification  Firstly, recoverable amount shall be estimated for the
of cash individual asset. If it is not possible to estimate the
generating recoverable amount of the individual asset, an entity
units is required to determine the recoverable amount of
the cash-generating unit to which the asset belongs
(ie. the asset’s cash-generating unit).
 The recoverable amount of an individual asset
cannot be determined if:
a) the asset’s value in use cannot be estimated to be
close to its fair value less costs of disposal; and
b) the asset does not generate cash inflows that are
largely independent of those from other assets.
 In such cases, value in use and recoverable amount,
can be determined only for the asset’s cash-
generating unit.
 If recoverable amount cannot be determined
for an individual asset, an entity identifies the
lowest aggregation of assets that generate largely
independent cash inflows.
 If an active market exists for the output produced
by an asset or group of assets, that asset or group of
assets shall be identified as a cash-generating unit,
even if some or all of the output is used internally.
 Cash-generating units shall be identified consistently
from period to period for the same asset or types of
assets.
FINANCIAL REPORTING
Guidance under Ind AS 36
Allocation  The carrying amount of a cash-generating unit:
of assets and (a) includes the carrying amount of only those assets
liabilities to that can be attributed directly, or allocated on
CGUs a reasonable and consistent basis, to the cash-
generating unit and will generate the future cash
inflows used in determining the cash-generating
unit’s value in use; and
(b) does not include the carrying amount of any
recognised liability, unless the recoverable amount
of the cash-generating unit cannot be determined
without consideration of this liability.
 Subtract the carrying amount of the liability to
determine both the cash-generating unit’s value in
use and its carrying amount to perform a meaningful
comparison between the carrying amount of the
cash-generating unit and its recoverable amount.
Allocating  For the purpose of impairment testing, goodwill
goodwill acquired in a business combination shall, from the
to cash- acquisition date, be allocated to each of the acquirer’s
generating cash-generating units, or groups of cash-generating
units units.
 The above allocation shall be irrespective of whether
other assets or liabilities of the acquiree are assigned
to those units or groups of units.
 Goodwill does not generate cash flows independently
of other assets or groups of assets and, therefore, it
will always be tested for impairment as part of a
CGU or a group of CGUs.
 If goodwill has been allocated to a cash-generating
unit and the entity disposes of an operation within
that unit, the goodwill associated with the operation
disposed of shall be:
a) included in the carrying amount of the operation
when determining the gain or loss on disposal; and
b) measured on the basis of the relative values of the
operation disposed of and the portion of the cash-
generating unit retained, unless the entity can
demonstrate that some other method better reflects
the goodwill associated with the operation disposed
of.
Timing of  Impairment test for a cash-generating unit to which
impairment goodwill has been allocated shall be performed
tests annually.
 If some or all of the goodwill allocated to a
cash-generating unit was acquired in a business
combination during the current annual period, that
unit shall be tested for impairment before the end of
the current annual period.
Sequence for testing of impairment for Cash
Generating Units (CGU)
Separate CGU Group of CGUs
Yes
Whether CGUs Whether some
contain goodwill? CGUs in the group
have goodwill
allocated to them?
No
No
Test CGU for
impairment
Firstly, test CGU
without goodwill
for impairment
Then, test CGU
with goodwill for
impairment
The Chartered Accountant Student July 2018 21
FINANCIAL REPORTING
Allocating corporate assets to cash-generating units for impairment

Yes
Whether a portion of the carrying amount of a corporate asset can be allocated on a reasonable and consistent basis to that unit? No

Yes No Step 1:
Whether CV of the CGU* > RV of the CGU? Compare CV of the CGU* with RV of the CGU
* CV includes the portion of the CV of the corporate asset allocated to it
* CV excludes corporate asset

Impairment loss is allocated Step 2:

No impairment loss
in the following order Identify the smallest group of CGU that includes the
CGU under review and to which a portion of the CV of
the corporate asset can be allocated on a reasonable and
Order 1 consistent basis
Reduce the CV of any goodwill allocated to CGU (group of units)
Step 3:
Compare CV of that Smallest group of CGU* with RV of
Order 2 group of units
Reduce CV of other assets of the unit (group of units) pro rata on * CV includes the portion of the CV of the corporate
the basis of the CV of each asset in the unit (group of units) asset allocated to that smallest group of CGU

In allocating an impairment loss to individual assets within a CGU, the carrying amount of an individual asset shall not be reduced below the
highest of:

Fair value less Value in use zero

costs to sell

Reversing an Impairment Loss (IP)

General Individual asset Cash-generating unit Goodwill

Impairment loss Reversal shall be allocated to the assets of the unit (except for Not permitted
is reversed if, and goodwill) on pro rata with the carrying amount of those assets.
only if, there has
been a change in the
estimates used to
determine the asset’s Increases in carrying amounts shall be treated as reversals of
recoverable amount impairment losses for individual assets.

Carrying amount of
In allocating a reversal of an impairment loss for a CGU, the
the asset is increased
carrying amount of an asset shall not be increased above the
to its recoverable
lower of:
amount.
a) Its recoverable amount; and
b)  The carrying amount (net of amortisation or
depreciation) determines had no impairment loss been
Impairment loss
recognised for the asset in prior periods.
is not reversed
just because of the
passage of time, even
if the recoverable
amount of the asset The reversal of the impairment loss that would otherwise have
becomes higher than been allocated to the asset is allocated pro rata to the other
its carrying amount. assets of the unit, except for goodwill

Asset without revaluation Asset with revaluation in the earlier years

On reversal, the A reversal of an impairment A reversal of an To the extent that an impairment

increased carrying
amount of an asset
(other than goodwill)
due to reversal of
an impairment loss
shall not exceed the
carrying amount
(net of amortisation/
depreciation) had no
impairment loss been
recognised for the
asset in prior years.
loss (other than goodwill)
is recognised immediately
in profit or loss unless the
asset is carried at revalued
amount
Any increase in excess of
this amount would be a
revaluation accounted for
under appropriate Standard
impairment loss on loss on the same revalued asset
a revalued asset is was previously recognised
recognised in OCI and in profit or loss, a reversal of
increases the revaluation that impairment loss is also
surplus for that asset. recognised in profit or loss.
After reversal, the depreciation /
amortisation charge for the asset is
adjusted in future periods on a systematic
basis over its remaining useful life.

For disclosure requirements of Ind AS 36 refer the study material.

22 July 2018 The Chartered Accountant Student

 FINANCIAL REPORTING
INDIAN ACCOUNTING STANDARD (IND AS) 38 : INTANGIBLE ASSETS
Scope of Ind AS 38
Intangible assets- Criteria
Applicability Non-Applicablility
Intangible assets other than Financial assets (Ind AS 32)
included in the list of non- Identifiability Control over Existence of future
applicability resources economic benefits

Expenditure on advertising, Recognition and measurement

training, start-up, research and of exploration and evaluation An asset is Control exists when an It includes (any)
development activities assets (Ind AS 106) identifiable entity has the power to
if it obtain the future economic
Rights under licensing Expenditure on the benefits flowing from the Revenue from
agreements for items such as development and extraction underlying resource and to the sale of
motion picture films, video of minerals, oil, natural gas restrict the access of others products or
recordings, plays, manuscripts, and similar non-regenerative to those benefits services
patents and copyrights resources

Other intangible assets used Intangible assets held by an Is separable Arises from The capacity Cost savings
(such as computer software), entity for sale in the ordinary contractual of an entity to
and other expenditure incurred course of business (Ind AS 2) or other legal control stems
(such as start-up costs), in rights from legal Other benefits
extractive industries or by Deferred tax assets (Ind AS 12) rights resulting from
insurers. the use of the
Leases (Ind AS 17) asset by the
entity
Assets arising from employee
benefits (Ind AS 19)
Goodwill acquired in a Recognition of Intangible Assets – General
business combination (Ind
AS 103)
Principles
Deferred acquisition costs and It is probable
intangible assets, arising from that the
an insurer’s contractual rights expected future
under insurance contracts (Ind economic
AS 104) benefits
Non-current intangible assets (attributable
classified as held for sale (or to the asset)
included in a disposal group will flow to the
that is classified as held for entity
sale) (Ind AS 105) An intangible
asset shall be
Assets arising from contracts recognised if,
with customers (Ind AS 115) and only if
Amortisation of the intangible
assets arising from service
concession arrangements in The cost of
respect of toll roads the asset can
be measured
reliably

Definition of Asset
Resource controlled by entity
Note: Probability of future economic benefits will exist if the entity
expects there to be an inflow of economic benefits, though there is
uncertainty about the timing or the amount of the inflow.

As a result of past event

Asset
Measurement of Intangible Asset
Future economic Intangible assets may be acquired or can be self generated. The below diagram
benefits are expected to reflect the method and mode by which Intangible assets may arise:
flow to the entity

Separate
Acquisition
Definition of Intangible Asset Part of a
Exchange of Business
assets combination
Intangible Assets
Intangible Asset
may arise from

Identifiable Non-monetary Without physical Internally

generated Government
asset substance intangible assets Grant
Internally
generated
goodwill

The Chartered Accountant Student July 2018 23

FINANCIAL REPORTING
A. Recognition and Measurement for intangible assets acquired D. Exchanges of assets
separately Measurement • One or more intangible assets may be acquired in
Recognition • The probability recognition criterion is always exchange for a non-monetary asset or assets, or a
combination of monetary and non-monetary assets.
for intangible considered to be satisfied for separately acquired • If an entity is able to measure reliably the fair value of
assets intangible assets. either the asset received or the asset given up, then
acquired • The cost of a separately acquired intangible the fair value of the asset given up is used to measure
separately asset can usually be measured reliably. This is cost unless the fair value of the asset received is more
clearly evident. (Refer chart on “Exchange of Assets”
particularly so when the purchase consideration given in Ind AS 16)
is in the form of cash or other monetary assets.
E. Internally generated goodwill
Measurement of Cost for Intangible Assets Recognition • Internally generated goodwill shall not be recognised
Acquired Separately as an asset.
• Internally generated goodwill is not recognised as
an asset because it is not an identifiable resource
Cost of Separately Acquired Intangible Asset controlled by the entity that can be measured reliably
at cost.

Purchase price Directly attributable Cost of preparing the

Internally generated Intangible Asset
including import duties asset for its intended use. (Cost of Employee
and non - refundable Benefits, Professional and Legal Fees Cost
purchase taxes of Testing) Recognition of Internally generated intangible assets

Includes Excludes Research phase Development

phase

Research is original and planned Development is the application

investigation undertaken with the of research findings or other
Costs of Professional Costs of Costs of Costs of Administration prospect of gaining new scientific knowledge to a plan or design for the
employee fees arising testing introducing conducting and other or technical knowledge and production of new or substantially
benefits directly from a new business general understanding improved asset
bringing product or in a new overhead costs.
the asset to service location or
its working with a new
condition class of No intangible asset arising An intangible asset arising from
customer from research phase shall be development phase shall be
recognised recognised if, and only if, an entity
can demonstrate all of the following:
Note:
1. Costs incurred in using or redeploying an intangible asset are not
included in the carrying amount of that asset. The technical feasibility of completing the intangible asset so that it will
2. Incidental operations not necessary to bring an asset to the be available for use or sale
condition necessary for it to be capable of operating in the
manner intended by management, the income and related Its intention to complete the intangible asset and use or sell it.
expenses of incidental operations are recognised immediately in
profit or loss.
Its ability to use or sell the intangible asset
3. If payment for an intangible asset is deferred beyond normal
credit terms, its cost is the cash price equivalent. The difference
between this amount and the total payments is recognised as How the intangible asset will generate probable future economic benefits
interest expense over the period of credit if not capitalised as per
Ind AS 23.
The availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset
B. Acquisition as part of a business combination
Recognition • The probability recognition criterion is always
Its ability to measure reliably the expenditure attributable to the
criteria for considered to be satisfied for intangible assets acquired intangible asset during its development
intangible assets in business combinations.
acquired as part • The reliable measurement criterion is always considered
of a business to be satisfied for intangible assets acquired in business
Note:
combination combinations.
1. If an entity cannot distinguish the research phase from the
• The acquirer may recognise a group of complementary
development phase of an internal project to create an intangible
intangible assets as a single asset provided the individual
asset, the entity treats the expenditure on that project as if it were
assets have similar useful lives.
incurred in the research phase only.
Measuring fair • If an intangible asset is acquired in a business 2. Internally generated brands, mastheads, publishing titles,
value combination, the cost of that intangible asset is its customer lists and items similar in substance shall not be
fair value at the acquisition date. recognised as intangible assets.
C. Acquisition by way of a government grant 3. The cost of an internally generated intangible asset is the sum
of expenditure incurred from the date when the intangible asset
Recognition If an intangible asset is acquired free of charge, or for
first meets the recognition criteria.
nominal consideration, by way of a government grant, an
4. Standard prohibits reinstatement of expenditure previously
entity recognises both the intangible asset and the grant
recognised as an expense.
initially at fair value as per Ind AS 20.

24 July 2018 The Chartered Accountant Student

 FINANCIAL REPORTING
Measurement after Recognition and Revaluation
Refer the charts for ‘Measurement after recognition’, ‘Frequency of revaluation’, ‘Treatment on application of revaluation model’ and
‘Treatment of revaluation gain or loss’ given in Ind AS 16. Same charts hold goods for Ind AS 38 also.

Additional important points to be remembered in case of revaluation of intangible asset

 If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active market for this asset,
• the asset shall be carried at its cost less any accumulated amortisation and impairment losses.
 If the fair value of a revalued intangible asset can no longer be measured by reference to an active market,
• the carrying amount of the asset shall be its revalued amount at the date of the last revaluation by reference to the active market less
any subsequent accumulated amortisation and any subsequent accumulated impairment losses.
 The fact that an active market no longer exists for a revalued intangible asset may indicate that the asset may be impaired.

Amortisation of an Intangible asset

Recognised in profit
or loss

Annually
If useful life is finite If useful life is indefinite* Test for
impairment
by comparing
its recoverable Whenever
amount with there is an
its carrying indication for
Intangible asset is
Intangible asset is amortised amount impairment
not amortised
based on its useful life**

The useful life shall be reviewed

periodically. The change in the useful
life assessment from indefinite to
finite shall be accounted for as a
Cessation of amortisation change in an accounting estimate as
Commencement of
period per Ind AS 8.
amortisation period

When the asset is

available for use
When the asset is classified as The date that
held for sale (or included in a At the earlier the asset is
disposal group i.e. classified as of the date derecognised
held for sale) as per Ind AS 105

Amortisation of an intangible asset with a finite useful life does not cease when the
intangible asset is no longer used, if the asset has not been fully depreciated or has not
been classified as held for sale (or included in a disposal group that is classified as held
for sale) as per Ind AS 105.

*The term ‘indefinite’ does not mean ‘infinite’.

**Useful life is equivalent to the length of, or number of production or similar units.

The Chartered Accountant Student July 2018 25

FINANCIAL REPORTING
Useful Life of an Intangible Asset
Useful life of an Factors considered in determining the useful Expected usage of the asset by the entity
intangible asset life of an intangible asset

Typical product life cycles for the asset and

If intangible asset arises from
contractual or other legal rights
The useful life shall
not exceed the period
of the contractual or
other legal rights
The useful life may be
shorter depending on
the period over which
the entity expects to
use the asset
Yes
public information on estimates of useful
lives of similar assets
If an intangible asset
is a reacquired right
arisen due to a business Technical, technological, commercial or
combination other types of obsolescence
Its useful life is the Stability of the industry in which the asset
remaining contractual operates and changes in the market demand
period of the contract for the products or services output from the
in which the right was asset
granted and shall not
include renewal periods Expected actions by competitors
Level of maintenance expenditure required
Whether the
contractual or Period of control over the asset and legal or
other legal rights similar limits on the use of the asset
can be renewed?

No Dependent on the useful life of other

assets of the entity
Useful life of the
intangible asset shall Useful life of the
include the renewal intangible asset
period(s) if renewal is shall not include the
without significant cost renewal period(s)

Amortisation Method
Factors influencing the useful life
Amortisation Method
Applied consistently
from period to period

The useful life is
Economic factors
the shorter of the
periods determined
by these factors
Straight-line
method
Method used is selected
Legal factors
on the basis of the
Diminishing expected pattern
balance method
of consumption of
the expected future
Units of economic benefits
production method embodied in the asset

Economic factors Legal factors may Commitment

determine the period restrict the period Residual by a third party
over which future over which the entity Value is to purchase at There is an
economic benefits controls access to assumed end of useful active market
will be received by these benefits to be zero life i.e. have
the entity unless there is a guaranteed
residual value or

26 July 2018 The Chartered Accountant Student

 FINANCIAL REPORTING
Note: Retirements and Disposals of Intangible
Particular Details Assets
Residual value other than zero It implies that an entity expects to dispose
of the intangible asset before the end of its By sale
economic life
Review of residual value The residual value is reviewed at least at By entering
each financial year-end On
disposal into finance
An intangible asset shall lease
Change in the asset’s residual A change in the asset’s residual value is be derecognised
value accounted for as a change in an accounting
estimate as per Ind AS 8
When
no future By donation
Increase in residual value to In such a situation, the asset’s amortisation Gain or loss = Net disposal economic
an amount equal to or greater charge is zero unless and until its residual proceeds - Carrying benefits
than the asset’s carrying value subsequently decreases to an amount of the asset are
amount amount below the asset’s carrying amount expected
Review of amortisation period Reviewed at least at each financial year-
from its
and amortisation method end Recognised in profit or use or
loss when the asset is disposal
Change in expected useful life Amortisation period shall be changed derecognised
Change in the expected pattern Amortisation method shall be changed to
of consumption of the future reflect the changed pattern
economic benefits Gains shall not be classified
as revenue
Accounting for changes in Such changes shall be accounted for
amortisation period/method as changes in accounting estimates in
accordance with Ind AS 8 For disclosure requirements of Ind AS 38 refer the study
material.

INDIAN ACCOUNTING STANDARD (IND AS) 40 : INVESTMENT PROPERTY

Scope of Ind AS 40

Applicability Non-Applicability

Measurement Measurement Biological Mineral rights Matters

in a lessee’s in a lessor’s assets related and mineral covered in Ind
financial financial to agricultural reserves such as AS 17
statements of statements of activity (Ind oil, natural gas
AS 41 and Ind and similar non-
AS 16) regenerative
resources
Investment Investment
property property
interests held provided to a
under a lease lessee under an Classification of leases as finance leases or
accounted for as operating lease operating leases
a finance lease
Recognition of lease income from investment
property

Measurement in a lessee’s financial statements of

property interests held under a lease accounted for
as an operating lease

Measurement in a lessor’s financial statements of its

net investment in a finance lease

Accounting for sale and leaseback transactions

Disclosure about finance leases and operating leases

The Chartered Accountant Student July 2018 27

FINANCIAL REPORTING
Investment Property

Includes Excludes

Property used in the production or supply

Land Building—or part Both Land of goods or services or for administrative
of a building and Building purposes

Property held for sale in the ordinary

course of business

Owner-occupied property. Ind AS 16

Held (by the owner or by the applies to it
lessee under a finance lease)

Property occupied by employees. Ind AS

16 applies to it
To earn rentals or for capital
appreciation or both
Owner-occupied property awaiting
disposal. Ind AS 16 applies to it

Property that is leased to another entity

under a finance lease

Examples of Investment Property Property Held for More Than One Purpose
Dual Purpose – Able to split
Land held for long-term capital appreciation

Owner Occupied Rental Income

Land held for a currently undetermined future use

Ind AS 16 Ind AS 40
A building owned by the entity (or held by the entity
under a finance lease) and leased out under one or
more operating leases
Dual Purpose – Unable to split
Ind AS 40
Owner Rental
A building that is vacant but is held to be leased out Occupied Income
under one or more operating leases

Property that is being constructed or developed for future It is probable

use as investment property that the future Costs include •Recognise in
economic • costs the carrying
benefits that incurred amount
are associated initially to the cost of
Investment with the replacing part
investment acquire an
property investment of an existing
Note: property will investment
shall be flow to the property and
In some cases, an entity owns property that is leased to, and occupied recognised entity property
• costs when it is
by, its parent or another subsidiary. The property does not qualify as an asset incurred incurred.
when, and The cost subsequently •The carrying
as investment property in the consolidated financial statements, of the to add to, amount of
only when
because the property is owner-occupied from the perspective of the investment replace part replaced
property can of, or service part is
group. be measured derecognised
reliably a property

28 July 2018 The Chartered Accountant Student

 FINANCIAL REPORTING
Measurement at Recognition Important Notes
S. No. Particular Detail
1. Cost of an (a) Start-up costs (unless necessary to bring the
An investment property shall be investment property to the condition necessary for it to be
measured initially at property does capable of operating in the manner intended by
not include management),
(b) Operating losses incurred before the investment
property achieves the planned level of occupancy,
or
Including (c) Abnormal amounts of wasted material, labour
Its cost or other resources incurred in constructing or
Transaction costs
developing the property.
2. Deferred • Cost of an investment property is its cash price
payment equivalent.
• The difference between this amount and the total
payments is recognised as interest expense over
Purchase Any directly attributable the period of credit.
price expenditure 3. Property • The initial cost shall be recognised as asset at the
interest lower of the fair value of the property and the
Professional fees held under present value of the minimum lease payments.
for legal services a lease and • An equivalent amount shall be recognised as a
classified as liability.
an investment • The item accounted for at fair value is that
property interest and not the underlying property.
Property transfer taxes • Any premium paid for a lease is treated as part of
the minimum lease payments and is included in the
cost of the asset, but is excluded from the liability.

Other transaction costs.

Measurement after Recognition
If fair value of
an investment
property is not
All entities reliably measurable
Exchange for Non-monetary Assets The cost model
shall measure
on a continuing
basis, the entity
An entity shall the fair value shall make the
to all of its disclosures for the
adopt as its for the purpose
investment same as well
accounting of disclosure
Entity policy property
Buys Sells only

Note:
• After initial recognition, an entity shall measure all of its
Investment property Asset given up investment properties (except asset classified as held for sale) in
acquired/received accordance with Ind AS 16’s requirements for cost model.
• Investment properties that meet the criteria to be classified as held
Measured at for sale (or are included in a disposal group that is classified as held
for sale) shall be measured in accordance with Ind AS 105.
Whether exchange
transaction has
commercial substance Transfers
Yes Or No 1) Transfers to, or from, investment property shall be made when,
the fair value is reliably and only when, there is a change in use, evidenced by:
measurable? a) Commencement of owner-occupation, for a transfer from
investment property to owner-occupied property;
Ind AS 40 Ind AS 16
b) Commencement of development with a view to sale, for a
Whether F.V of transfer from investment property to inventories;
Yes No An Investment property
asset received is Ind AS 40 Ind AS 2
is measured at the
clearly evident? c) End of owner-occupation, for a transfer from owner-
carrying amount of the
asset given up occupied property to investment property; or
Ind AS 16 Ind AS 40
d) Commencement of an operating lease to another party, for a
transfer from inventories to investment property.
An Investment Ind AS 2 Ind AS 40
An Investment
property is 2) Transfers between investment property, owner-occupied
property is
measured at F.V of measured at F.V of property and inventories do not change the carrying amount of
asset received asset given up the property transferred and they do not change the cost of that
property for measurement or disclosure purposes.

The Chartered Accountant Student July 2018 29

FINANCIAL REPORTING
Disposals S. Particular Detail
No.

Gain or loss = Net 1. Date of • The date is when the recipient obtains
An investment
disposal proceeds - disposal for control of the investment property
property should be
Carrying amount of investment for determining when a performance
derecognised property obligation is satisfied.
the asset
• Ind AS 17 applies to a disposal effected by
entering into a finance lease and to a sale
and leaseback.
2. Measurement • The consideration receivable on disposal
of of an investment property is recognised
No future consideration initially at fair value
On disposal When the
investment property economic receivable on • If payment for an investment property
is permanently benefits are disposal is deferred, the consideration received
withdrawn from use expected from its is recognised initially at the cash price
disposal equivalent.
• The difference between the nominal
amount of the consideration and the
cash price equivalent is recognised as
Sale interest revenue
3. Compensation • Compensation from third parties for
Recognised in profit investment property that was impaired,
& loss in the period of lost or given up shall be recognised in
retirement or disposal. profit or loss when the compensation
Entering into a becomes receivable.
finance lease
For disclosure requirements of Ind AS 40 refer the study
material.

Student Activity Portal

The Board of Studies has developed a Student Activity Portal to help its students to get themselves
registered from anywhere anytime for various students’ programmes being organised by Regional
Councils and Branches.

The students can login from time to time to register for events like, Student Seminars, Student
Conferences, Mock Tests, Workshop, Special Counselling Programme for CA Students, CA Students
Talent Search, CA Students festival, Sports Competition etc. To register, the students can login using
their credentials and pay the required registration fees online (through Debit Card/Credit Card/ Net
Banking) on student’s activity portal itself. After successful registration, the student will be eligible to
attend the event.

The students are advised to visit: https://bosactivities.icai.org/and login with the below mentioned
details in order to activate their account and register for the events from time to time.
User Name- Students Registration no. (i.e. WRO0123456)
Password - Date of birth in DDMMYYYY format.
Director, Board of Studies

30 July 2018 The Chartered Accountant Student

financial reporting
Ind AS 37 : Provisions, Contingent Liabilities and Contingent Assets
Overview of Ind AS 37

Recognition Measurement Reimbursements Change and use Application of Disclosure

of provisions the recognition
and measurement
rules
Provision Contingency Best estimate

Future
Provision
Present Contingent operating losses
Risk and
obligation liability
uncertainties
Onerous Contingent
Past event Contingent contracts liability
Asset Present value

Contingent
Probable outflow of Restructuring
asset
resources embodying Future events
economic benefits

Expected
Reliable estimate of the disposal of
obligation assets

To ensure that appropriate recognition criteria

and measurement bases are applied
Objective For provisions,
of Ind AS contingent liabilities and
37 contingent assets
To ensure that sufficient information is
disclosed in the notes to understand nature,
timing & amount

Financial Ind AS 115 'Revenue from Except lease that becomes

instruments Contracts with Customers' onerous before the
(including commencement date of the
guarantees) within lease as per Ind AS 116
the scope of Ind Ind AS 12 'Income Taxes'
AS 109

Except short-term leases and

Ind AS 116 'Leases' leases for which
the underlying asset is of low
Ind AS 37 value and that have become
Those covered by Ind AS 19 'Employee Benefits' onerous
does not another Ind AS
apply to
Notes:
Ind AS 104 'Insurance • Items such as depreciation,
Contracts' impairment of assets and doubtful
debts are adjustments to the carrying
Contingent Consideration amounts of assets and are not dealt
of an acquirer in a business with in this Standard.
combination (Ind AS 103) • Ind AS 37 neither prohibits nor
Executory requires capitalisation of the costs
Contracts* recognised when a provision is made.
• This Standard applies to provisions
Except those are onerous in for restructurings (including
nature discontinued operations).

10 October 2019 The Chartered Accountant Student

 financial reporting

*Executory Contracts

Either
Or

In which neither party Both parties have partially

has performed any of its performed their obligations
obligations to an equal extent

Provisions

It is a liability**
Either Or

Of uncertain timing Of uncertain amount

Settlement is expected
**Liability Present obligation Arising from past to result in outflow of
of the entity events resources embodying
economic benefits

No realistic alternative other than to settle that obligation

Either Or

A legal obligation* #
A constructive obligation

is derived from (any) is derived from entity’s actions by

Contract (explicit or Legislation Other operation of law

implicit terms)

- Established pattern of Entity has indicated Entity has created

past practice to other parties that a valid expectation
- Published policies it will accept certain that it will
- Sufficiently specific responsibilities discharge those
current statement responsibilities

The Chartered Accountant Student October 2019 11

financial reporting
Contingent Liability

An entity shall not recognise a

contingent liability

A possible obligation A present obligation

Arising from past events Arising from past events

Or Not recognised because

Its existence will be confirmed
only by the occurrence or
Either Or
non-occurrence of one or more
uncertain future events
Outflow of resources
The amount of the
embodying economic
obligation cannot be
benefits to settle the
measured with sufficient
obligation will probably be
Not wholly within the reliability
not required
control of the entity

Notes:
1. The term ‘contingent liability’ is used for liabilities that do not meet the recognition criteria.
2. Where it is not probable that a present obligation exists, an entity discloses a contingent liability. Probable means ‘more likely than not’.
3. If the possibility of an outflow of resources embodying economic benefits is remote, contingent liability is not disclosed.
4. Where an entity is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is
treated as a contingent liability. The entity recognises a provision for the part of the obligation for which an outflow of resources
embodying economic benefits is probable, except in the extremely rare circumstances where no reliable estimate can be made.
5. Contingent liabilities are assessed continually to determine whether an outflow of resources embodying economic benefits has become
probable. If it becomes probable, a provision is recognised in the period in which the change in probability occurs.

Whose existence
will be confirmed Not wholly
Contingent A possible Arising from only by the within the
Asset asset past events occurrence or non- control of the
occurrence of one entity
or more uncertain
future events

An entity shall not recognize a contingent asset

Notes:
1. Contingent assets are not recognised in financial statements since it may never be realised.
2. When the realisation of income is virtually certain, then the related asset is recognised.
3. Contingent asset is disclosed where an inflow of economic benefits is probable.
4. Contingent assets are assessed continually. If it has become virtually certain, the asset and the related income are recognised in the
financial statements of the period in which the change occurs.

Differences between Provisions & Other Liabilities

S. No Provisions
1 In provisions, there is uncertainty about the timing or amount
of the future expenditure required in settlement
2 Provisions are reported separately
Other liabilities (Trade payables or accruals)
• Trade payables are liabilities to pay for goods or services
that have been received or supplied and have been invoiced
or formally agreed with the supplier. Hence uncertainty is
generally much less than for provisions
• Accruals are similar to trade payables. However, it may also
include amounts due to employees
Accruals are often reported as part of trade and other payables

12 October 2019 The Chartered Accountant Student

 financial reporting
Recognition of a Provision

No
Is there a present obligation (legal or constructive) for an entity?

Yes
No
Has the present obligation occurred as a result of past event?

Yes
A provision
No
Will there be probability for outflow of resources to settle the will not be
obligation? recognised

Yes
No
Can an entity make a reliable estimate of it?

Yes

Recognise a Provision

Notes:
1. If these conditions are not met, no provision should be recognised.
2. Where there are a number of similar obligations (eg product warranties or similar contracts) the probability that an outflow will be
required in settlement is determined by considering the class of obligations as a whole.
3. Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer
probable, then the provision shall be reversed.
4. Where discounting is used, the carrying amount of a provision increases in each period to reflect the passage of time. This increase is
recognised as borrowing cost.

Present Obligation

Generally, present obligation is clear when it arises. However,

when it is not clear then

A past event is deemed to give rise to a present obligation

If, taking account of all available evidence

It is more likely than not It is more likely

That a present obligation exists at the end of the That no present obligation exists at the end of the
reporting period reporting period

Recognize a provision (If the recognition criteria Disclose contingent liability (Unless the
are met) possibility of an outflow of resources embodying
economic benefits is remote)
Notes:
• No provision is recognised for costs that need to be incurred to operate in the future.
• Only those liabilities are recognised in an entity’s balance sheet which exist at the end of the reporting period.

The Chartered Accountant Student October 2019 13

financial reporting
Obligations arising from past events MEASUREMENT

Existing independently of an entity’s future actions

Best
Yes No Estimate

Recognize Provision Don’t recognize

(If the recognition Provision
criteria are met)

Expected Risk and

To the extent that Disposal of Measurement Uncertainity
Because the entity Assets
the entity is obliged can avoid the future
to rectify damage expenditure by its
already caused future actions

Examples:
- Penalties or clean-up costs for Future
Events Present
unlawful environmental damage Example:
Value
- Decommissioning costs of an oil - Fitting smoke
installation or a nuclear power filters in a certain
station type of factory

Best estimate in measurement of provision amount

Measurement of estimates of outcome & financial effect considers

Provision should be
the best estimate of
expenditure required Management’s judgement
to settle the present
obligation (At the end
of the reporting period)
Supplemented by:
- Experience of similar transactions - Reports from independent experts

If Provision involves items of large population (Ex. customer refunds, warranties, etc.)
Provision should be
measured before tax
Weight all possible outcomes by their associated probabilities (expected value)

In continuous range of possible outcomes

When each point in that range is as likely as any other

Then mid-point of the range is used

In case of measurement of single obligation

Individual most likely outcome may be the best estimate (Consider other possible
outcomes too)

If other possible outcomes are either mostly higher or mostly lower than the most
likely outcome

Higher or lower amount will be the best estimate

14 October 2019 The Chartered Accountant Student

 financial reporting
Risks and Uncertainties in measurement Present Value in measurement of provision amount
of provision amount

Whether the effect of the time value of money is material?

Risk is variability of outcome

Yes No

It should be considered in reaching the best

estimate of an amount of provision Consider present value Ignore present value
of expenditures expected
to settle the obligation as
provision amount
Risk adjustment = Expected excess amount to
be paid
The discount rate should be a pre-tax rate

Consider present value of outflows due to Discount rate should not reflect risks for which future
uncertainty cash flow estimates have been adjusted

Risk adjustment may increase the amount at
which a liability is measured
Caution: Income or assets are not overstated
and expenses or liabilities are not understated
Risk adjustment can be accounted for in
number of ways as:
The expected present value of outflows are calculated as
follows:
• Each outcome is discounted to its present value
• The present value of outcomes are weighted by their
associated probabilities
• Where discounting is used, the carrying amount of
a provision increases in each period to reflect the
passage of time.
• This increase is recognised as borrowing cost

Future events in measurement of provision amount

Adding in: Adjusting: Adjusting:
Expected Estimates Discount
present of future rate
value of outflows
future
outflows Should be reflected where there is sufficient
objective evidence that they will occur

Disclosure of the uncertainties surrounding the Effect of possible new legislation is taken into
amount of the expenditure should be made consideration when sufficient objective evidence
exists that legislation is virtually certain to be
enacted

Evidence is required both of:

• what legislation will demand
• whether it is virtually certain to be enacted
and implemented in due course

The Chartered Accountant Student October 2019 15

financial reporting
Gains on the expected Recognise gains on expected
Expected disposal of assets disposal of assets disposals of assets at the time
in measurement of provision are not taken into specified by the Standard
amount account in measuring a dealing with the assets
provision concerned

Reimbursements
Situation The entity has no obligation for Where some or all of the expenditure required Where some or all of the
the part of the expenditure to be to settle a provision is expected to be reimbursed expenditure required to settle
reimbursed by the other party by another party and it is virtually certain that a provision is expected to be
reimbursement will be received if the entity reimbursed by another party
settles the provision but the reimbursement is NOT
virtually certain
Recognition The entity has no liability for the • The reimbursement is recognised as a separate The expected reimbursement is
amount to be reimbursed. Hence asset in the balance sheet not recognised as an asset
no provision will be made • In the statement of profit and loss, the expense
relating to a provision may be presented net of
the amount recognised for a reimbursement
• The amount recognised for the expected
reimbursement shall not exceed the liability
Disclosure No disclosure is required The reimbursement is disclosed together with The expected reimbursement is
the amount recognised for the reimbursement disclosed

Future operating losses Unavoidable costs

Economic
benefits
Onerous of meeting the expected to be
contract obligations under received under
the contract the contract
Provisions shall not be recognised for future
operating losses

Present obligation is to be recognised and measured

as a provision
As they do not meet the definition of a liability and
the general recognition criteria set out for provisions

Executory contracts that are not onerous fall outside

An expectation of future operating losses is an the scope of Ind AS 37
indication that certain assets of the operation may be
impaired

Make provision amount for the lower of

An entity tests these assets for impairment under
Ind AS 36, Impairment of Assets

Penalty /
Unavoidable costs of Compensation for not
fulfilling the contract meeting the obligations
from the contract

Recognize any impairment loss as per Ind AS 36

on assets dedicated to onerous contract before
making a separate provision for an onerous
contract

16 October 2019 The Chartered Accountant Student

 financial reporting
Restructuring

In general, restructuring is a plan of management to change the scope of business or manner of conducting
business

Examples of events that may fall under the definition of restructuring:

• sale or termination of a line of business;
• closure of business locations or relocation of business activities;
• changes in management structure; and
• fundamental reorganizations that have a material effect on the nature and focus of the entity’s operations

Provision for restructuring costs is recognized only when the general recognition criteria set out for provisions
are met

An obligation to restructure arises only if entity has

Raised valid expectation in those affected

Detailed formal plan for restructuring that it will carry out restructuring (through
implementation or announcement of main
features of restructuring)

Identifying at least:
(i) the business or part of a business concerned;
(ii) the principal locations affected;
(iii) the location, function, and approximate number of employees who will be compensated for terminating
their services;
(iv) the expenditures that will be undertaken; and
(v) when the plan will be implemented.

No obligation arises for the sale of an operation until there is a binding sale agreement

When the sale of an operation is envisaged as part of a restructuring, the assets of the operation are reviewed for
impairment, under Ind AS 36

Restructuring provision includes only direct expenditures arising from the restructuring, which are both

Necessarily demanded by restructuring Not associated with the ongoing activities of entity

Restructuring provision does not include costs of:

• Retraining or relocating continuing staff;
• Marketing; or
• Investment in new systems and distribution networks.

The Chartered Accountant Student October 2019 17

financial reporting
Disclosure

For Provisions (Disclose for each class)*

Carrying amount at period’s beginning and end

Additional provisions made

Amounts incurred and charged against provision

Unused amounts reversed

Unwinding of discount due to time value

Comparative information is not required

For contingent liability Whether possibility of any outflow in

settlement is remote

No Yes No disclosures required

(Disclose for each class) (a) an estimate of its financial effect#

A brief description of the
nature of contingent liability
(b) an indication of the uncertainties
relating to the amount or timing of any
outflow
(c) possibility of any reimbursement

Whether inflow of economic

For contingent Assets benefits is probable

Yes No No disclosure is required

A brief description of An estimate of their

the nature of contingent financial effect#
liability

* Disclose the following for each class of provision:

a) Nature of obligation and expected timing of any resulting outflows
b) Uncertainties about the amount or timing of those outflows
c) Any expected reimbursement
Provisions or contingent liabilities may be aggregated to form a class, but consider whether the nature of items is sufficiently
similar for a single statement
#
If required information is not disclosed since not practicable to do so, that fact shall be stated

18 October 2019 The Chartered Accountant Student

GFRS Case study
FINAL (NEW) ELECTIVE PAPER 6E: GLOBAL FINANCIAL REPORTING STANDARDS
The objective of this elective paper is to develop an understanding of the key concepts and principles of International
Financial Reporting Standards and to acquire the ability to apply such knowledge to address issues and make
computations in practical case scenarios.
In a pursuit to provide quality academic inputs to the students to help them in grasping the intricate aspects of the
subject and practising the case studies, the Board of studies has decided to bring forth a crisp and concise capsule.
The four capsules of Final Paper 1 Financial Reporting published in July, 2018, May, 2019, August, 2019 and October,
2019 are also relevant for this paper. For a comprehensive revision, students should refer to these capsules along with
the amendments notified after their release, if any. However, those capsules should be read with reference to IFRS.
Also students are advised to refer the announcement webhosted on the website at the link https://resource.cdn.icai.
org/58128bos47461.pdf for understanding the applicability of IFRS in this paper.
In this Journal, we have provided three case studies on IFRS for practice purpose. Each case study deals with more
than one IFRS. These case studies should be solved under examination conditions to evaluate your understanding
and preparation level.

GFRS Case study 1

Buildwell Ltd. is a diversified business group operating in multiple
business segments across Europe, United States and Asia Pacific.
It maintains its books of accounts and publishes its annual
consolidated financial statements as per under International
Financial Reporting Standards.
The Central Finance team has been working on closing the books
of accounts and generating consolidated financial statements for
the year ended 31st March 2019. You are the Finance Controller
and your assistants want your views on the follwing transactions
for finalization of financial statements .
On 1 April 2018, Buildwell Ltd. completed the manufacture
of some inventory at a total cost of R 8,00,000. In order to be
suitable for sale in the ordinary course of business, the completed
inventory needed to be stored in controlled conditions for a two-
year period. The inventory is expected to sell for R 12,00,000 after
the two-year storage period. On the same day, Buildwell Ltd.
sold the inventory to Black Ltd., a bank for R 8,10,000. For this
sale, Black Ltd. charged Buildwell Ltd. an administration fee of
R 10,000. Buildwell Ltd. retained physical custody of the
inventory and ensured that the inventory is stored in the
appropriate conditions.
As per the agreement with Black Ltd., Buildwell Ltd. would
indemnify Black Ltd against any losses caused by theft or
inappropriate storage of the inventory. Buildwell Ltd. has the
option to repurchase the inventory on 31 March 2020 for
R 9,33,120. On 1 April 2018, Black Ltd .would have required
an annual return of 8% on loans made to customers such as
Buildwell Ltd.
On 1 April 2017, Buildwell Ltd. had granted share appreciation
rights to 200 senior executives. Each executive will receive 2,000
rights on 31 March 2020 provided he or she continues to be
employed by Buildwell Ltd. on 31 March 2020
On 1 April 2017, the directors estimated that all the executives
would remain employed by Buildwell Ltd. for the three-year period
ending on 31 March 2020. However, 10 executives left in the year
ended 31 March 2018. On 31 March 2018, the directors believed
that a further 10 executives would leave in the following two years.
Five executives actually left in the year ended 31 March 2019 and
the directors now believe that seven more directors will leave in
the year ended 31 March 2020. Since 1 April 2017, the fair value
of the share appreciation rights has fluctuated as follows:
Date Fair value of one right R any rental as an incentive to Buildwell Ltd. to sign the lease
1 April 2017 1.60
31 March 2018 1.80
31 March 2019 1.74
One of the directors of Buildwell Ltd., Mr. Ben Jones has informed
Central Finance team that on 1 January 2019, his spouse acquired
a controlling interest in one of Buildwell Ltd.’s major suppliers,
Candour Ltd.
Mr. Jones seemed to think that this would have implications on
the financial statements of Buildwell Ltd. However, your assistant
in Central Finance team is not clear about its implications/
treatment while finalizing the financial statements.
Buildwell Ltd. has been purchasing goods from Candour Ltd.
R 1.5 million per month of the year ended 31 March 2019. As
per the financial statements of Buildwell Ltd., this is a significant
amount. While checking all the purchase transactions it was
found that all the purchases from Candour Ltd. were made at
normal market rates.
Buildwell Ltd. intends to open a new retail store under its Retail
division at a new location in the next few weeks. As per the
financial records of the Company, a substantial sum of money has
been spent on a series of television advertisements to promote
this new store.
Buildwell Ltd. paid for advertisements costing
R 8,00,000 before 31 March 2019 out of which R 5,00,000 relates
to advertisements shown before 31 March 2019 and R 3,00,000
to advertisements shown in April 2019. Since 31 March 2019,
Buildwell Ltd. has paid R 4,00,000 for further advertisements.
The assistant of Central Finance team felt that all these
expenses should be written off as expenses in the year ended
31 March 2019. While going through the profitability projections
of the Division presented to the Board, it becomes evident that
a charge of R 1.2 million would adversely affect the profitability
against 2019 projected profits.
In your weekly finance meeting, one of your new assistants, a newly
qualified Chartered Accountant says that these costs can be carried
forward as intangible assets. On getting this idea you connect with
the Marketing Director and he shares with you the market research
report related to this store. According to the market research
report, the new store is supposed to be highly successful.
On 1 April 2018, Buildwell Ltd. had also leased a machine from
Donovan Ltd. on a three-year lease. The expected future economic
life of the machine on 1 April 2018 was eight years. If the machine
breaks down, then under the terms of the lease, Donovan Ltd.
would be required to repair the machine or provide a replacement.
Donovan Ltd. agreed to allow Buildwell Ltd. to use the machine
for the first six months of the lease without the payment of
agreement. After this initial period, lease rentals of R 2.10,000
were payable six-monthly in arrears, the first payment falling due
on 31 March 2019.
On 1 June 2018, Buildwell Ltd. decided to dispose of the business
and current and non-current assets of one of its divisions

06 May 2020 The Chartered Accountant Student

 GFRS Case study
related to Speciality chemicals business which it had acquired Assets 31st March 31st March
several years ago. This disposal does not involve Buildwell Ltd. 2018 2019
withdrawing from a particular market sector. The carrying values
on 1 June 2018 of the assets to be disposed of were as follows: Income tax payable 1,20,000 1,32,000
Particulars R Million Accumulated 12,00,000 13,20,000
Goodwill 10.0 Total 90,78,000 1,03,50,000
Property, Plant and Equipment 20.0
Patents and trademarks 8.0 The original cost of equipment sold during the year 2018-2019
Inventories 15.0 was R 7,20,000.
Trade Receivables 10.0 Analyze the transactions mentioned above and show the
None of the assets of the business had suffered impairment as at treatment in line with relevant IFRS .
1 June 2018. At that date the inventories and trade receivables of
the business were already stated at no more than their recoverable I. Multiple Choice Questions
amounts. 1 Calculate the current liability of leased machine from
Donovan Ltd to be shown in the Statement of Financial
Buildwell Ltd. offered the business for sale at a price of R 46.5
Position as at 31 March 2019.
million, which was considered to be reasonably achievable.
(a) R 70,000
Buildwell Ltd. estimated that the direct costs of selling the
(b) R 1,40,000
business would be R 5,00,000. These estimates have not changed
(c) R 3,50,000
since 1 June 2018 and Buildwell Ltd. estimates that the business
will be sold by 31 March 2019 at the latest. (d) R 4,20,000
2. Compute the value of Speciality chemical division’s Goodwill
One of the subsidiaries of Buildwell Ltd. submitted to Central at the date of classification after re-measurement.
Finance team its Summarized Statement of Profit or Loss and (a) R 7.3 million
Statement of Financial Position. (b) R 10 Million
(c) R Nil
Summarized Statement of Profit or Loss
(d) R 8 million
Particulars Amount (R) 3. Calculate the closing balance of Speciality chemical division’s
Net sales 2,52,00,000 asset – Property, Plant and Equipment at the period end.
Less: Cash cost of sales (1,92,00,000) (a) R 21 million
Depreciation (6,00,000) (b) R 17.36 million
(c) R 6 million
Salaries & wages (24,00,000)
(d) R 15 million
Operating expenses (14,00,000) 4. Suppose financial statements of Buildwell Ltd. included an
Provision for taxation (8,80,000) investment in associate at R 66,00,000 in its consolidated
Net Operating Profit 7,20,000 statement of financial position at 31 March 2018. At
Non-recurring income – profit on sale of equipment 1,20,000 31 March 2019, the investment in associate had increased
8,40,000 to R 67,50,000. Buildwell Ltd.’s pre-tax share of profit in
the associate was R 4,20,000, with a related tax charge of
Retained earnings and profit brought forward 15,18,000
R 1,80,000. The net amount was included in the consolidated
23,58,000 income statement for the year ended 31 March 2019.
Dividends declared and paid during the year (7,20,000) There were no impairments to the investment in associate, or
Profit & loss balance as on 31st March 2019 16,38,000 acquisitions or disposals of shares during the financial year.
What is the amount of the cash flow related to investment in
Summarized Statement of Financial Position associate for inclusion in the Consolidated Statement of cash
Assets 31st March 31st March flows for the year ended 31 March 2019?
2018 2019 (a) Cash inflow of R 90,000
(b) Cash inflow of R 2,40,000
Non Current Assets
(c) Cash outflow of R 90,000
Property, Plant and Equipment: (d) Cash inflow of R 4,20,000
Land 4,80,000 9,60,000 5. Buildwell Ltd.’s another subsidiary reported net income of
Buildings and Equipment 36,00,000 57,60,000 R 25 million, which equals the company’s comprehensive
Current Assets income. The company has no outstanding debt. Using the
Cash 6,00,000 7,20,000 following information from the comprehensive statement of
financial position (R in millions), what cashflow should the
Inventories 16,80,000 18,60,000
Buildwell Ltd.’s subsidiary report, as financing activity in the
Trade Receivables 26,40,000 9,60,000 statement of cash flows?
Advances 78,000 90,000
Total Assets 90,78,000 1,03,50,000 Extract of Statement of Financial Position
Liabilities & Equity 31.03.2018 31.03.2019
Share capital 36,00,000 44,40,000 (R) (R)
Surplus in profit & loss 15,18,000 16,38,000 Equity share capital 100 100
Trade Payables 24,00,000 23,40,000 Further issue of equity shares 100 140
Outstanding expenses 2,40,000 4,80,000 Retained earnings 100 115

The Chartered Accountant Student May 2020 07

GFRS Case study
31.03.2018 31.03.2019
(R) (R)
Total shareholders’ equity 300 357
(a) Issuance of equity shares R 240 million; dividends paid
R 10 million
(b) Issuance of equity shares R 100 million; dividends paid
R 10 million
(c) Issuance of equity shares R 140 million; dividends paid
R 10 million
(d) Issuance of equity shares R 40 million; dividends paid
R 10 million
II. Descriptive Questions
6. With respect to ‘sale of inventory by Buildwell Ltd. to
Black Ltd.’, how much amount should be recognized in
the Statement of profit or loss and Statement of financial
position for the year ended 31 March 2019. Also show the
classification of calculated amount as current or non-current
in the Statement of financial position.
7. With respect to ‘Grant of share appreciation rights by
Buildwell Ltd. to its executives’, how much amount should be
recognized in the Statement of profit or loss and Statement
of financial position for the year ended 31 March 2019. Also
show the classification of calculated amount as current or
non-current in the Statement of financial position.
8. How the effect of acquisition of controlling interest in
Candour Ltd. by Mr. Ben Jones is to be reflected in the
financial statements for the year ending 31 March 2019.
9. What would be the treatment of expenditure incurred by
Buildwell Ltd. against the advertisements or opening a new
retail store?
10 Work out a cash flow statement for the year ended 31 March
2019.
ANSWER TO CASE STUDY 1
I. Answers to Multiple Choice Questions
1 Option (a)
Justification:
In accordance with the principles of IFRS 16 – Leases –
the lease of the machine is an operating lease because the
risks and rewards of ownership of the machine remain
with Donovan Ltd. The lease is for only three years of
the eight-year life and Donovan Ltd is responsible for
breakdowns, etc.
Therefore, Buildwell Ltd will recognize lease rentals
as an expense in the statement of profit or loss. IFRS
16 stipulates that this should normally be done on a
straight-line basis.
The total lease rentals payable over the whole lease term
are R 10,50,000 (R 2,10,000 x 5). Therefore the charge for
the current year is R 3,50,000 (R 10,50,000 x 1/3).
The difference between the charge for the period
(R 3,50,000) and the rent actually paid (R 2,10,000) will be
shown as a liability in the statement of financial position at
31 March 2019. This amount will be R 1,40,000.
R 70,000 (2 x R 2,10, 000 – R 3,50, 000) of this liability will
be current and R 70,000 non-current.
08 May 2020 The Chartered Accountant Student
2 Option (c)
3 Option (d)
Justification for 2 & 3:
Pursuant to the provisions of IFRS 5, Non-current Assets
Held for Sale and Discontinued Operations the business
would be regarded as held for sale from 1 June 2018. The
held for sale criteria apply because the business is being
actively marketed at a reasonable price and the sale is
expected to be completed within one year of the date of
classification. Given this classification, IFRS 5 requires
that the assets be separately classified under current
assets in the statement of financial position. No further
depreciation would be charged on these assets.
The assets will be measured at the lower of their current
carrying amounts at the date of classification and their fair
value less costs to sell. In this case, the total carrying amount
after re-measurement will be R 46 million (R 46.5 million –
R 0.5 million).
The impairment loss of R 17 million (R 63 million –
R 46 million) will first be allocated to goodwill taking its
carrying amount to nil.
None of the remaining impairment loss will be allocated
to inventories or trade receivables since their recoverable
amounts are at least equal to their existing carrying
amounts.
The remaining impairment loss of R 7 million (R 17 million
– R 10 million) will be allocated to the property, plant and
equipment and the patents on a pro-rata basis.
The closing carrying amounts of the property, plant
and equipment and the patents will be R 15 million and
R 6 million respectively.
4 Option (a)
Justification:
Statement of investment in associates
Particulars Amount
(R)
Opening balance of investment in Associate 66,00,000
Add: Share of profit in Associate [4,20,000-
1,80,000] 2,40,000
Less: Cash flow (dividend paid by Associate)
(balancing figure) (90,000)
Closing balance of investment in Associate 67,50,000
5 Option (d)
Justification:
Issuance of equity shares including further issue of equity
shares (240 – 200) = R 40 million
Dividends paid worked out as under:
Particulars R in million
Opening retained earnings 100
Add: Net income 25
Less: Cash dividend paid (balancing figure) (10)
Closing retained earnings 115
Hence, cash dividend paid R 10 million.
 GFRS Case study
II. Answers to Descriptive Questions related party transactions were made on terms equivalent to
those that prevail in arm’s length transactions are made only
6 The transaction related to revenue is governed by the
if such terms can be substantiated.
principles of IFRS 15 – Revenue from contracts with
customers. The disclosure is required to state that Candour Ltd.,
controlled by the spouse of a director, supplied goods to
One of the conditions imposed by IFRS 15 for recognizing
the value of R 4.5 million (3 x R 1.5 million) in the current
the revenue from the sale of goods is that the control of
accounting period.
ownership has to be passed to the ‘buyer’.
9 Under IAS 38 ‘Intangible Assets’, intangible assets can only
Since Buildwell Ltd. continue the custody of the goods and
be recognised if they are identifiable and have a cost which
the fact that it has the option to repurchase it on 31 March
can be reliably measured.
2020 makes the probability high that the control is to be
continued with Buildwell Ltd. only. Accordingly, based on These criteria are very difficult to satisfy for internally
the circumstances of the case, it is apparent that this is a developed intangibles.
financing transaction. For these reasons, IAS 38 specifically prohibits recognizing
Therefore, the goods will remain in inventory at cost – being advertising expenditure as an intangible asset.
their manufactured cost of R 8,00,000 plus one year’s storage The fact that how successful the store is likely to be, does not
costs (or their net realisable value, whichever is lower). affect this prohibition.
The net proceeds of R 8,00,000, being a financial liability, Therefore, your assistant in Central Finance team is correct in
is accounted for under the principles of IFRS 9 ‘Financial principle that such costs should be recognised as an expense.
Instruments’.
However, the costs would be recognised on an accruals basis
Under IFRS 9, most financial liabilities are measured at based on the satisfaction of the performance obligation.
amortized cost using the effective interest method. The
finance cost for the period would be R 64,000 (R 8,00,000 x Therefore, out of R 8,00,000 of the advertisements paid for
8%). This would be shown in the Statement of profit or loss. before 31 March 2019, R 5,00,000 would be recognised as an
expense and R 3,00,000 as a pre-payment in the year ended
The closing financial liability would be R 8,64,000 (R 8,00,000 31 March 2019.
+ R 64,000). This would be shown as a current liability since
the ‘repurchase’ occurs on 31 March 2020 – 12 months after R 4,00,000 of advertisement cost paid since 31 March
the reporting date. 2019 would be charged as expenses in the year ended
31 March 2020.
7 Under the principles of IFRS 2 – Share-based Payment –
granting of share appreciation rights (SARs) to executives is a 10 Cash Flow statement for the year ended 31st March 2019
cash-settled share-based payment. Cash-settled share-based (Indirect method)
payments create a liability in the statement of the financial Particulars R R
position as they will ultimately be redeemed in cash. The Cash flow from operating activities:
liability is recognised based on the fair value of the SAR at
Net Profit before taxes and extraordinary 16,00,000
the reporting date and the expected number of rights which
items (7,20,000+8,80,000)
will vest. Under the principles of IFRS 2, this liability is built
Add: Depreciation 6,00,000
up over the vesting period.
Operating profit before working capital
Therefore the liability at 31 March 2019 would be R 4,12,960 changes 22,00,000
(2000 x (200 – 10 – 5 – 7) x R 1.74 x 2/3). Increase in inventories (1,80,000)
Since the rights are not exercisable until after 31 March 2020, Decrease in debtors 16,80,000
the liability would be shown as a non-current liability. Advances (12,000)
The charge to profit or loss would be R 1,96,960 ie the Decrease in sundry creditors (60,000)
difference between the closing liability (R 4,12,960) and the Increase in outstanding expenses 2,40,000
opening liability (R 2,16,000). This charge would be shown as Cash generated from operations 38,68,000
an operating cost. Less: Income tax paid (Refer W.N.4) (8,68,000)
Note: The liability at 31 March 2018 would have been Net cash from operations 30,00,000
R 2,16,000 (2,000 x (200 – 10 – 10) x R 1.80 x 1/3). Cash from investing activities:
8 In accordance with IAS 24 ‘Related Party Disclosures’, Purchase of land (4,80,000)
effective 1 January 2019, Candour Ltd. would be regarded as Purchase of building & equipment (28,80,000)
a related party of Buildwell Ltd. This is because Candour Ltd. (Refer W.N.2)
is controlled by the close family member of one of Buildwell Sale of equipment (Refer W.N.3) 3,60,000
Ltd.’s key management personnel (Refer para 9 of IAS 24). Net cash used for investment activities (30,00,000)
This means that from 1 January 2019, the purchases from Cash flows from financing activities:
Candour Ltd. would be regarded as related party transactions. Issue of share capital 8,40,000
Dividends paid (7,20,000)
As per the provisions of para 18 of IAS 24, transactions with
Net cash from financing activities: 1,20,000
related parties need to be disclosed in the notes to the financial
Net increase in cash and cash equivalents 1,20,000
statements, together with the nature of the relationship. It is
irrelevant whether or not these transactions are at normal Cash and cash equivalents at the beginning 6,00,000
market rates. As per para 23 of the standards, disclosures that Cash and cash equivalents at the end 7,20,000

The Chartered Accountant Student May 2020 09

GFRS Case study
Working Notes:
1. Building & Equipment Account
Particulars R Particulars R
To Balance b/d 36,00,000 By Sale of assets 7,20,000
To Cash/bank 28,80,000 By Balance c/d 57,60,000
(purchases)(bal fig)
64,80,000 64,80,000
2. Building & Equipment Accumulated Depreciation Account
Particulars R Particulars R
To Sale of asset (acc. 4,80,000 By Balance b/d 12,00,000
depreciation)
To Balance c/d 13,20,000 By Profit & Loss 6,00,000
A/c (provisional)
18,00,000 18,00,000
GFRS Case study 2
Bean Ltd is a diversified group having multiple business interests
in many countries. The group publishes its financial statements
as per International Financial Reporting Standards.
During closure of books for the year ended 31st March 2019,
certain transactions were highlighted by the group finance team.
The Finance Controller is confused on the treatment of these
transactions under International Financial Reporting Standards
and needs your assistance.
On 1 October 2017, Bean Ltd purchased 8 million of Charlie
Ltd.’s 12 million equity shares. The acquisition was financed by
a cash payment of R 2.00 per share. Out of this R 2 per share,
R 1.20 per share being payable on 1 October 2017 and
R 0.80 being payable on 30 September 2018. Any discounting
calculations should be performed using a cost of capital of 8%
per annum.
A share exchange took place of 1 equity share in Bean Ltd for
every 2 shares acquired in Charlie Ltd. The market value of
Charlie Ltd.’s share was R 3.90 per share on 1 October 2017. The
market value of Bean Ltd.’s per share was R 4 on 1 October 2017
and R 4.20 on 31 March 2018.
On 30 September 2018, Bean Ltd further issued 1 share for
every 8 shares acquired in Charlie Ltd provided the profits after
tax of Charlie Ltd exceeds R 5 million. The fair value of this
consideration on 1 October 2017 is 4 million. Estimates indicate
that this share issue is likely to be made.
Bean Ltd incurred acquisition costs of R 6,00,000. R 3,50,000 of
these costs were external due diligence costs, R 1,00,000 were
spent on Bean Ltd.’s best estimate of management time spent in
negotiating the acquisition and R 1,50,000 were costs incurred in
connection with the issue of Bean Ltd’s shares.
The directors of Bean Ltd carried out a fair value exercise on
1 October 2017 and the following matters emerged:
• The net assets of Charlie Ltd that were recognized in Charlie
Ltd’s own financial statements were R 30 million based on
their carrying values in the individual financial statements of
Charlie Ltd.
• On 1 October 2017, the carrying value of Charlie Ltd’s freehold
property was R 15 million. The property had been purchased
10 May 2020 The Chartered Accountant Student
3. Computation of sale price of Equipment
Particulars R
Original cost 7,20,000
Less Accumulated Depreciation (4,80,000)
Net cost 2,40,000
Profit on sale of assets 1,20,000
Sale proceeds from sale of assets 3,60,000
4. (Provision for tax Account)
Particulars R Particulars R
To Bank A/c 8,68,000 By Balance b/d 1,20,000
To Balance c/d 1,32,000 By Profit & Loss 8,80,000
A/c (provisional)
10,00,000 10,00,000
on 1 October 2007 for R 17.5 million and the building element
of the property (allocated cost R 10 million) was being
depreciated over its estimated useful economic life of 40 years.
• On 1 October 2017, the market value of the property was
R 22 million, of which R 12 million related to the buildings
element. The original estimate of the useful economic life of
the buildings is still considered valid.
• On 1 October 2017, Charlie Ltd was engaged in contracts
with three different customers under which they supplied
goods to each customer for a five year period from 1 October
2017. The directors of Bean Ltd believe that this creates an
intangible asset with a fair value of R 7.5 million.
• In addition the directors of Bean Ltd believe that the fair
value of the assembled workforce of Charlie Ltd creates
an intangible asset with a fair value of R 15 million.
The average remaining working life of the employees of
Charlie Ltd at 1 October 2017 is 15 years. None of these
intangible assets has been recognised in the individual
financial statements of Charlie Ltd.
• At 1 October 2017 Charlie Ltd was engaged in a legal dispute
with a customer. The directors of Charlie Ltd consider
that the case can be successfully defended and have made
no provision for legal costs in its financial statements.
The directors of Bean Ltd estimated that the fair value of
the claim at 1 October 2017 was R 6,00,000. Events since
1 October 2017 have reduced this estimate to R 5,00,000 by
31 March 2018.
Due to the acquisition of Charlie Ltd the directors of Bean
Ltd intend to reorganise the group, starting in June 2019. The
estimated cost of this reorganisation is R 20 million.
For the year ended 31 March 2018, Charlie Ltd reported a post-
tax profit of R 6 million (accruing evenly over the period) and
paid a dividend of R 1.5 million on 31 December 2017 out of
post-acquisition profits.
The retained earnings of Bean Ltd at 31 March 2018 were R 18
million. This figure includes the dividend received from Charlie
Ltd but does not include any other adjustments to its own earnings
that are required as a result of the acquisition of Charlie Ltd.

The acquisition costs of R 6,00,000 referred above have been
charged to retained earnings by Bean Ltd. Bean Ltd has no
subsidiaries other than Charlie Ltd and no associates or joint
venture entities.
The goodwill on acquisition of Charlie Ltd had not suffered any
impairment at 31 March 2018.
On 1 April 2018, Bean Ltd began joint construction of a
pipeline with another investor. Bean Ltd and the other investor
have signed a contract that provides for joint operation and
ownership of the pipeline. All of the ongoing expenditure,
comprising maintenance plus borrowing costs, was to be shared
equally. The pipeline was completed and ready for use on
1 October 2018, at which date its estimated useful economic life
was 20 years.
The pipeline was first used on 1 January 2019. The total cash cost
of constructing the pipeline was R 40 million. This cost was partly
financed by a loan of R 10 million taken out on 1 April 2018.The
loan carries interest at an annual rate of 10% with interest payable
in arrears on 31 March each year. Between 1 January 2019 and 31
March 2019, it was necessary to spend R 400,000 on maintenance
costs.
On 1 April 2018, Bean Ltd purchased some land for R 10 million
(including legal costs of R 1 million) in order to construct a new
factory. Construction work commenced on 1 May 2018. Bean Ltd
incurred the following costs in connection with its construction:
• Preparation and leveling of the land – R 3,00,000.
• Purchase of materials for the construction – R 6.08 million in
total.
• Employment costs of the construction workers – R 2,00,000
per month.
• Overhead costs incurred directly on the construction of the
factory – R 1,00,000 per month.
• Ongoing overhead costs allocated to the construction
project using Bean Ltd’s normal overhead allocation model
– R 50,000 per month.
• Income received during the temporary use of the factory
premises as a car park during the Construction period –
R 50,000.
• Costs of relocating employees to work at the new factory –
R 3,00,000.
• Costs of the opening ceremony on 31 January 2019 –
R 1,50,000.
The factory was completed on 30 November 2018 (which
is considered as substantial period of time) and production
began on 1 February 2019. The overall useful life of the
factory building was estimated as 40 years from the date of
completion. However, it is estimated that the roof will need to
be replaced 20 years after the date of completion and that the
cost of replacing the roof at current prices would be 30% of the
total cost of the building.
At the end of the 40-year period, Bean Ltd has a legally
enforceable obligation to demolish the factory and restore the
site to its original condition. The directors estimate that the cost
of demolition in 40 years’ time (based on prices prevailing at that
time) will be R 20 million. An annual risk adjusted discount rate
which is appropriate to this project is 8%. The present value of
Re.1 payable in 40 years’ time at an annual discount rate of 8%
is 4.6 paise.
GFRS Case study
The construction of the factory was partly financed by a loan of
R 17.5 million taken out on 1 April 2018. The loan was at an
annual rate of interest of 6%.
During the period 1 April 2018 to 31 August 2018 (when the loan
proceeds had been fully utilised to finance the construction),
Bean Ltd received investment income of R 1,00,000 on the
temporary investment of the proceeds.
On 1 April 2018, Bean Ltd raised loan finance from European
investors. The investors subscribed for 50 million €1 loan notes
at par. Bean Ltd incurred incremental issue costs of €1 million.
Interest of €4 million is payable annually on 31 March, starting
on 31 March 2019. The loan is repayable in € on 31 March 2028
at a premium and the effective annual interest rate implicit in
the loan is 10%. The appropriate measurement basis for this loan
is amortized cost. Bean Ltd uses INR as its functional currency.
Relevant exchange rates are as follows:
• 1 April 2018 – €1 = R 82.00.
• 31 March 2019 – €1 = R 85.00
• Average for year ended 31 March 2019 – €1 = R 83.00
On 1 April 2017, Bean Ltd granted share options to 200 senior
executives. The options will vest on 31st March 2020 subject to
the following conditions:
• Each executive will be entitled to 1,000 options if the
cumulative profit in the three-year period from 1 April 2017
to 31st March 2020 exceeds R 30 million. If the cumulative
profit for this period is between R 35 million and R 40 million,
then 1,500 options will vest. If the cumulative profit for the
period exceeds R 40 million, then 2,000 options will vest.
• If an executive leaves during the three-year vesting period,
then management would forfeit any rights of share options
to those executives.
• Notwithstanding the above, no options will vest unless the
share price at 31st March 2020 exceeds R 5.
Details of the fair value of the shares and share options at relevant
dates are as follows:
Date Fair value of Bean Fair value of each
Ltd.’s each share (R) option (R)
1 April 2017 4.00 0.50
31 March 4.00 0.60
2018
31 March 4.00 0.75
2019
The estimate of the cumulative profit for the three-year period
was revised each year as follows:
Date Expected profit for the three-year
period R million
1 April 2017 32
31 March 2018 39
31 March 2019 45
On 1 April 2017, none of the senior executives were expected
to leave in the three-year period from 1 April 2017 to 31 March
2020 and none left in the year ended 31 March 2018. However,
10 executives left unexpectedly on 31 December 2018. None of
the other executives are expected to leave before 31 March 2020.
Bean Ltd correctly reflected this arrangement in its financial
statements for the year ended 31 March 2018.
The Chartered Accountant Student May 2020 11
GFRS Case study
I. Multiple choice questions
1. Computation of goodwill under full goodwill method
follows:
(a) Fair value of net assets on acquisition plus Fair value
of consideration minus fair value of non-controlling
interest
(b) Fair value of consideration plus fair value of non-
controlling interest minus fair value of net assets
(c) Fair value of consideration plus fair value of non-
controlling interest plus fair value of net assets on
acquisition
(d) Fair value of consideration minus fair value of non-
controlling interest minus fair value of net assets.
2. At the end of the 40-year period, Bean Ltd. has a legally
enforceable obligation to demolish the factory and restore the
site to its original condition. Cost of demolition recognised
as a provision would be:
(a) R 20.0 million
(b) R 9.2 million
(c) R 0.92 million
(d) R 10.0 million.
3. Pursuant to IAS 21, which of the following factors will not be
used in determining the entity’s functional currency?
(a) The currency that primarily influences the prices at
which goods and services are sold
(b) The currency in which the costs of the entity are mainly
denominated
(c) The currency which is used mostly for international
trading in that industry
(d) The currency in which funds from financing are
generated.
4. Calculate the closing balance of loan finance at period end
which the Bean limited has raised from European investors.
(a) R 4,241.5 million
(b) R 4,141.7 million
(c) R 4,165.0 million
(d) R 4,084.7 million.
5. Calculate the exchange difference of loan finance from
European investors to be recognized in profit or loss for the
given period.
(a) Gain-R 156.8 million
(b) Loss-R 156.8 million
(c) Loss-R 223.5 million
(d) Gain-R 223.5 million.
II. Descriptive Questions
6 Compute the fair value of consideration related to acquisition
of Charlie Ltd and thereon Compute the goodwill on
acquisition of Charlie Ltd as initially measured at 1 October
2017.
7 Compute the balance of retained earnings that will be shown
in the consolidated Statement of financial position of Bean
Ltd at 31 March 2018.
8 Show treatment on Joint Arrangement with respect to
borrowing cost, cost of asset, its depreciation and Statement
of Profit or Loss for the year ending 31 March 2019.
12 May 2020 The Chartered Accountant Student
9 Compute the carrying amount of the factory as at 31 March
2019, depreciation and carrying amount as at 31 March 2019.
10 Compute treatment related to share based payment to be
included under Statement of Profit & Loss, comprehensive
income and statement of financial position at 31 March 2019.
Note: Your figures should be supported by appropriate
explanations and workings.
ANSWER TO CASE STUDY 2
Answers to Multiple Choice Questions
1 Option (b)
2 Option (c)
Justification:
Demolition cost recognised as a provision - Where an
obligation must recognize as part of the initial cost.
The present value of Re.1 payable in 40 years’ time at an
annual discount rate of 8% is 4.6 paise. Hence, the working
is as under:
USD 20 Million x 4.6/100 = R 0.92 million
3 Option (c)
4 Option (a)
5 Option (b)
Justification for 4 & 5:
The initial measurement of the loan in € is €49 million (€50
million – €1 million).
The finance cost in € is €4•9 million (€49 million x 10%).
The closing balance of the loan in € is €49.9 million (€49
million + €4•9 million – €4 million).
IAS 21, 'The Effect of Changes in Foreign Exchange
Rates', stipulates that foreign currency transactions are
initially recorded at the rate of exchange in force when the
transaction was first recognized.
Therefore, the loan would initially be recorded at R 4,018
million (€49 million x R 82).
The finance cost would be recorded at an average rate for
the period since it accrues over a period of time.
The finance cost would be R 406.7 million (€4.9 million x
R 83).
The actual payment of interest would be recorded at R 340
million (€4 million x R 85).
The loan balance is a monetary item so it is translated at
the rate of exchange at the reporting date. So the closing
loan balance is R 4,241.5 million (€49.9 million x R 85).
The exchange differences that are created by this treatment
are recognized in profit or loss.
In this case, the exchange difference is
((R 4,018 million + R 406.7 million – R 340 million) –
R 4,241.5 million) = R 156.8 million. This exchange loss is
taken to Statement of profit or loss.
 GFRS Case study
Answers to Descriptive Questions 7. Statement of computation of retained earnings as at

6. Statement of computation of original goodwill on 31st March 2018:

acquisition of Charlie Ltd Particulars R in million

Particulars R in million Bean Ltd – as given 18.00

Fair value of consideration given (W.N.1) 35.88 Interest charge on deferred cash
consideration (5.93 x 8% x 6/12) (0.2372)
Share of fair value of net assets acquired
(8/12 x 43.9) (W2) (29.27) Re organisation provision – Per IAS 37,
Provisions, Contingent Liabilities and
Goodwill 6,61
Contingent Assets- an intention is not an
obligation Nil
Working Notes:
Add back acquisition costs – In accordance
1. Computation of purchase consideration with IFRS 3, 350 included in cost of
Particulars R in million investment and 150 deducted from share
premium 0.50
Immediate cash payment – actual amount
Total (A) 18.2628
paid (8 million x R 1.20) 9.6
Charlie Ltd (6.00 x 6/12) – only post-
Deferred cash payment – present value of acquisition earnings included 3.00
actual amount payable (8 million x Re.0.80
Dividend paid out of post-acquisition
x 0.9259) 5.93
profits (1.50)
Share exchange – 4 million shares issued at Extra depreciation on building (W.N.1)) (0.075)
a market value of R 4 per share (4 million x
Amortization of customer relationship
R 4 per share) 16.00
asset : 7.5 x 1/5 x 6/1 (0.75)
Contingent consideration – included as Reduction in fair value of contingency
share issue is probable. Present value is claim 0.10
implied in the share price. 4.00
A post acquisition item 0.775
Acquisition costs – direct costs of the Total (B) (0.775 x 8/12) 0.517
acquisition other than the costs of issuing
shares 0.35 Total consolidated retained earnings (A+B) 18.78

Total 35.88
Working Note:
Statement showing excess depreciation on building at
2. Computation of fair value of net assets acquired 31st March 2018
Particulars R in million Particulars R in million
As per financial statements of Charlie Ltd 30.00 New depreciation on revised value (12.00 x
1/30 x 6/12) 0.200
Adjustment for property – Market value
exceeds carrying value 7.00 Depreciation charge on previous value
(10.00 x 1/40 x 6/12) (0.125)
Adjustment for customer relationships
Excess depreciation charge 0.075
– an identifiable intangible asset with a
measurable fair value 7.50
8. As provided in IFRS 11 'Joint Arrangements' this is a joint
Adjustment for workforce – as per IAS 38,
arrangement, because two or more parties have joint control
'Intangible assets' assembled workforce
of the pipeline under a contractual arrangement.
fails the control test Nil
The arrangement will be regarded as a joint operation because
Adjustment for re-organization – as per Bean Ltd and the other investor have rights to the assets and
IFRS 3 'Business combinations' it must be
obligations for the liabilities of this joint arrangement.
treated as post acquisition items Nil
This means that Bean Ltd and the other investor will each
Adjustment for contingency claim (fair recognize 50% of the cost of constructing the asset in
value as on 1 October 2017) (0.60)
property, plant and equipment.
Fair value of net assets acquired 43.90 The borrowing cost incurred on constructing the pipeline
should, under the principles of IAS 23, 'Borrowing Costs,'

The Chartered Accountant Student May 2020 13

GFRS Case study
be included as part of the cost of the asset for the period of
Investment income on temporary
construction. investment of the loan proceeds - Must
In this case, the relevant borrowing cost to be included is offset against the amount capitalized (0.10)
R 5,00,000 (R 1,00,00,000 x 10% x 6/12).
Demolition cost recognised as a provision -
The total cost of the asset is R 4,05,00,000 (R 4,00,00,000 +
Where an obligation must recognize as part
R 5,00,000). of the initial cost 0.92
R 2,02,50,000 is included in the property, plant and
Total 19.9125
equipment of Bean Ltd and the same amount in the property,
plant and equipment of the other investor.
Computation of accumulated depreciation
The depreciation charge for the year ended 31 March 2019
Particulars R in million
will therefore be R 10,12,500 (R 4,05,00,000 x 1/20 x 6/12).
R 5,06,250 will be charged in the Statement of profit or loss Total depreciable amount 9.9125 All of the net
finance cost of 0.5125 (0.6125-0.10) has been
of Bean Ltd and the same amount in the Statement of profit
allocated to the depreciable amount
or loss of the other investor.
Depreciation of roof : 9.9125 x 30% x 1/20
The other costs relating to the arrangement in the current
x 4/12 0.04956
year totaling R 9,00,000 (finance cost for the second half year
Depreciation of remainder : 9.9125 x 70%
of R 5,00,000 plus maintenance costs of R 4,00,000) will be x 1/40 x 4/12 0.05782
charged to the Statements of profit or loss of Bean Ltd and
Total depreciation 0.10738
the other investor in equal proportions – R 4,50,000 each.

9. Computation of the cost of the factory Computation of carrying amount

Particulars R in million
Particulars R in million
Total depreciable amount 19.9125
Purchase of land - both the purchase of
Depreciation 0.10738
the land and the associated legal costs are
direct costs of constructing the factory 10.00 Carrying amount 19.80512

Preparation and leveling - A direct cost of

10 In accordance with IFRS 2, 'Share based payment' amount
constructing the factory 0.300
included in Statement of financial position as at 31 March 2019
Cost of materials - A direct cost of Particulars R in million
constructing the factory 6.08
Number of executives - Expected to
Employment costs of construction workers continue till 31.3.2020 190 Nos
- A direct cost of constructing the factory Options vesting for each executive - Used
for a seven-month period 1.40 expected number based on latest estimates
Direct overhead costs - A direct cost of as a non-market vesting condition 2000
constructing the factory for a seven-month Impact of expected share price - This is
period 0.70 a market-based vesting condition and is
ignored for this purpose None
Allocated overhead costs - Not a direct cost
of construction Nil Fair value of option - Used fair value on
grant date as per IFRS 2 R 0.50
Income from use as a car park - Not
essential to the construction so recognised Proportion of vesting 2/3
directly in profit or loss Nil Included in equity – (190 x 2,000 x R 0.50
x 2/3) R 1,26,667
Relocation costs - Not a direct cost of
construction Nil Amount included in Statement of profit or loss and other
comprehensive income for the year ended 31 March 2019
Opening ceremony - Not a direct cost of
construction Nil Particulars R Amount
Cumulative amount recognised in equity at
Finance costs - Capitalize the interest cost 31 March 2019 1,26,667
incurred in an eight-month period (purchase
of land would not trigger off capitalization Amount recognised in previous years –
since land is not a qualifying asset. Infact, (200 x 1,500 x R 0.50 x 1/3) (50,000)
the construction started from 1 May 2018) 0.6125 Included in current year’s profit or loss 76,667

14 May 2020 The Chartered Accountant Student

 GFRS Case study
GFRS CASE STUDY 3
RK Super Markets Ltd. owns a chain of retail stores across Item code Category Description Reported Actual Qty R Cost per
16 different locations in the twin cities of Hyderabad and Qty UoM*
Secunderabad. For the year ended 31st March 2019, your firm S-143118 Cooking Oil Soyabean 5,140 cans 5,014 cans 585
5 Ltr
of chartered accountants has been engaged for the stock audit
D-189107 Hygiene Detergent 2,018 1,973 705
assignment which comprises of the following:
Soap boxes boxes
(a) Physical stock take at all store locations D-125109 Hygiene Dishwash 1,619 1,508 647
(b) Verification of inventory valuation reports submitted by each Bars boxes boxes
store-in-charge and approval of the same D-119120 Hygiene Sanitary 1,819 1,718 1,200
(c) Report to management regarding the final inventory value as Pads boxes boxes
on 31st March 2019 and P-121113 Kitchenware NS Kadhai 561 units 516 units 329
P-713114 Baby care Diapers 819 packs 759 packs 490
(d) Report to the statutory auditors based on the final inventory
*Unit of measurement
valuation report after the changes as surfaced during the
stock audit III – Valuation policies and actual
A team of 32 articled assistants and four chartered observations (compiled for each test case
accountants have been deployed by your firm to carry out the based on samples)
assignment. The physical stock take began at store location at 1. Stock held under safe custody for free items to be claimed by
6 am and went on till 10 pm, as the management couldn’t afford to customers (on offers) have been valued at zero. Customers
close the stores for more than one working day. The assignment have a right to claim the free item within 14 days from date
was executed well on the day of physical stock take and the team of invoice. If the time limit of 14-day exceeds, the claim is
along with the CAs gathered for the queries and observations for foregone by the customer. Majority of the free items require
the next 3 days. online registration by the buyers for participation in the
Retail method of valuation is applied to most of the stock items contest conducted by the respective brand which needs to be
except for the items mentioned below which have been valued on done by the buyers within 3 days from the date of invoice.
the basis of FIFO or Weighted Average Cost. Observations:
(a) Few items were found written “Not for sale. This item
Following observations were made by the team: needs to be given free along with ……”. The cost of such
Store No. E004 items was included in the list of miscellaneous goods
with a value of R 5.8 Lacs.
I - Expired items: (b) Few items under this category were found damaged. The
Personal care category – Hand wash packs containing 20 units replacement cost of such items would be R 1.5 Lacs.
each (15 packs) had an expiry date of February, 2019. Cost-to-
2. Grains and pulses are valued at cost on FIFO basis except for
company (CTC) of each pack (20 units each) is R 1,200. The same
rice which is valued on weighted average cost basis.
has been valued as inventory at net realisable value (NRV) from
Observations:
the respective supplier with 2% more than the cost, because the
(a) Following discrepancies were observed in the valuation
supplier has an obligation to take back the expired stock.
of rice –
The similar observation was made in the following stores which
Quantity Weighted Value of Value of
had the stock from the same lot: (gunny avg. cost per inventory inventory as
Store No. No. of packs bags) Unit as per WAC reported
formula
E001 14
156 R 719 1,12,164 1,25,174
S003 18
107 R 926 99,082 1,02,182
W002 17
N001 11 101 R 1,139 1,15,039 1,29,017
N002 13 114 R 2,619 2,98,566 3,19,105
N003 09 (b) Discrepancies pertaining to other grains and pulses were
as follows:
II – Quantity mismatch: (compiled across all
Quantity Cost per Value of Value of
the stores) (gunny Unit based inventory as inventory as
Item code Category Description Reported Actual Qty R Cost per bags) on FIFO per FIFO reported
Qty UoM* calculation
R-510101 Snacks Biscuits 1,689 1,589 1,190
boxes boxes
162 R 2019 3,27,078 3,41,658
R-511012 Snacks Namkeen 851 boxes 681 boxes 1,890 171 R 1630 2,78,730 2,94,975
R-522104 Beverages Coke 1,809 1,691 cases 1,300
cases 139 R 2618 3,63,902 3,77,941
S-144109 Grains Wheat 1851 1681 630
gunny gunny 181 R 1325 2,39,825 2,58,649
bags bags 152 R 2214 3,36,528 3,51,880

The Chartered Accountant Student May 2020 15

GFRS Case study
3. Snacks and Beverages are valued at weighted average cost. assumed as 300 days, though the total days of the year should
Observations: be considered as 360 days.
(a) Following discrepancies were noted in the valuation of 8. The packing unit has 20 workers and a quality manager. The
snacks average salary cost of the packing unit is R 3,25,000 per month.
Quantity Weighted Value of Value of Depreciation of packing tools and other miscellaneous assets
(boxes) avg. cost per inventory inventory as at the packing unit is R 1,80,000 per annum.
box as per WAC reported 9. Direct cost of packaging works out to R 1.5 per packing unit
formula
of turmeric powder and R 2.15 and R 3.25 of Daliya packing
166 R 703 1,16,698 1,20,018 units of 500 grams and 1 kg pack respectively.
167 R 653 1,09,051 1,13,727 On the date of physical verification, the packing unit had a stock
171 R 813 1,39,023 1,42,443 of five days as per normal capacity of each product.

169 R 809 1,36,721 1,40,101 I. Multiple Choice Questions

170 R 715 1,21,550 1,24,270 Choose the best option from the given choices for each of the
question or statement below:
(b) Valuation of beverages also had the following deviations 1. In personal care category, hand-wash item has been
Quantity Weighted Value of Value of _____________ by ___________ keeping in view the valuation
(12-bottles avg. cost per inventory inventory as principles in IFRS.
pack) pack as per WAC reported
formula (a) Undervalued, R 2,328
(b) Undervalued, R 2,823
301 R 612 1,84,212 1,87,523
(c) Overvalued, R 2,328
315 R 615 1,93,725 1,98,765 (d) Overvalued, R 1,18,728
319 R 627 2,00,013 2,04,798 2. Since the company has a right to return the expired goods to
respective suppliers, it will be treated as
325 R 630 2,04,750 2,10,925
(a) Expense
311 R 633 1,96,863 2,03,705 (b) Loss of inventory
(c) Other Current Asset – Receivables from the Suppliers
(d) Income
IV – Other observations: 3. The replacement cost of goods that need to be given as free
Two items of inventory belong to the own brand of the company. items to customers shall be treated as _________ as per the
They get the items manufactured from various housewives on
principles of IFRS.
per unit cost basis. Following process is followed in respect of
(a) Provision
such own-brand items:
(b) Contingent liability
1. Daliya (broken wheat) is procured from housewives who
(c) Loss of inventory
process the whole wheat given by the company. Cost of tools
(d) Expense
required for the same are borne by the housewives which is a
nominal investment of R 3,000 each. 4. The inventory cost of turmeric powder and daliya of RK
2. Turmeric powder is also procured in the similar manner brand shall not include the following:
where raw turmeric is given to housewives who process the (a) Cost of manpower at the packing unit
same to return in powder form. (b) Cost of tools used by the housewives in processing the
3. Packaging of both these products is done at company’s central goods
packing location in Kondapur village near Hyderabad. (c) Depreciation of packing tools and other assets at the
4. The stock of wheat with housewives on the date of valuation packing centre
was 1200 kgs and that of raw turmeric 150 kgs. The stage (d) Rent of the packing centre.
of completion of process at the place of housewives can’t be 5. During the year, the packing unit was closed for a month
determined. due to unforeseen circumstances. Due to which the normal
5. The payment of housewives' work is done based on return capacity utilisation for the year was 11 months /12 months
of goods, after the process and quality check at the central instead of 100%. Will it have any impact of the amount
packing location on daily basis, at the rate of R 6 / kg of of depreciation allocated to packed units? How will the
Daliya and R 25 / kg of turmeric powder. depreciation amount be allocated during the year?
6. Goods that are packed for final sale from the stores are (a) No. Total depreciation of R 1,80,000 will be allocated to
despatched on weekly basis to the respective stores. the packed units
7. Rent of R 60,000 per month paid for the packing location (b) Yes. Depreciation of R 1,65,000 will be allocated to the
is amortised over the number of units packed during the
packed units and R 15,000 will be recognised as expenses
month. A normal capacity per day is 150 kgs of turmeric
(c) Yes. Total depreciation of R 1,80,000 will be recognised
powder packed into 200 grams each and 1200 kgs of daliya
as expenses
packed into 500 grams and 1 kg in the ratio of 2:1 of total
(d) No. Depreciation of R 1,62,000 will be allocated to the
stock produced. No. of working days in a year should be
packed units and R 18,000 will be recognised as expenses

16 May 2020 The Chartered Accountant Student


II. Descriptive Questions
6. Based on the deviations observed during the physical stock
take, calculate the amount by which closing inventory is
overvalued at RK Super Markets Ltd. Exclude the stock of
own-brand goods.
7. News of health threat in particular brand noodles
were going viral on social media since 29th March 2019. On
2nd April 2019, the Supreme Court ordered a ban on the sale
of such noodles with immediate effect until the investigations
are complete which in all probability would take around
6 months’ time. However, the existing stock will not be useful
for sale. Line no. 2 and 3 in snacks category given in 3(a) refer
to two different varieties of the noodles of that brand. What
will be the treatment of that stock if the NRV is zero and the
cost of safe disposal is R 20,000? As per the agreement with
the supplier the goods once sold by the supplier will be under
the risk of the retailer.
8. If the average cost of raw material for daliya and turmeric
powder is R 27.25 per kg and R 105.50 per kg what is the
value of inventory of turmeric powder and daliya of RK
brand assuming that the cost of packing material in stock on
the valuation date was R 21,907 and R 14,148 respectively for
daliya and turmeric powder and allocation of fixed overheads
is done in the ratio of 2:1 for daliya and turmeric?
ANSWER TO CASE STUDY 3
GFRS Case study
a) An entity has a present obligation (legal or
constructive) as a result of a past event;
b) It is probable that an outflow of resources embodying
economic benefits will be required to settle the
obligation; and
c) A reliable estimate can be made of the amount of the
obligation.
In the instant case, it is not clear as to how many customers
will actually do the needful to claim the free item and
within the prescribed time limit. However, the maximum
amount of liability that may arise assuming all customers
will do the needful can be estimated reliably. Hence a
provision should be recognised.
4. Option (b)
Justification:
Para 10 of IAS 2 specifies that the cost of inventories shall
comprise all costs of purchase, costs of conversion and
other costs incurred in bringing the inventories to their
present location and condition.
Further, para 12 also elaborates on the examples of cost
of conversion. Accordingly, in the instant case the cost of
tools owned by the housewives does not fit in since the
cost is not incurred by the company hence not forming
part of the cost of inventory.
5. Option (b)

Answers to Multiple Choice Questions Justification:

1. Option (d) Para 13 of IAS 2 clarifies that the amount of fixed overhead
allocated to each unit of production is not increased as a
Justification: consequence of low production or idle plant. Unallocated
As per para 6 of IAS 2, inventories are assets: overheads are recognised as an expense in the period in
(a) Held for sale in the ordinary course of business; which they are incurred.
(b) In the process of production for such sale; or Accordingly, the rate of allocation per unit will remain
(c) In the form of materials or supplies to be consumed in same based on the normal capacity. Any unallocated
depreciation due to idle plant is to be recognised as an
the production process or in the rendering of services.
expense during the year.
Expired items are held for return to respective vendors
In the instant case depreciation for the whole year is
and does not fit into any criteria above for recognition as R 1,80,000 and hence the per unit allocation cost of
inventory. depreciation would be:
Hence, the entire valuation done at NRV is overvalued Particulars
inventory calculated as below: Depreciation per (given) (a) R 1,80,000
Total expired stock of Hand wash packs is (15 + 14 +18 annum
Normal capacity Refer Working Note (b) 8,25,000 packs
+17+ 11 +13 +9) = 97 packs Depreciation per (a) / (b) 0.21818
Total cost of 97 packs = R 1,200 per pack x 97 packs = packing unit = (c)
Actual (8,25,000 / 12) x 11 7,56,250
R 1,16,400 production units (d)
Valuation done at NRV = R1,16,400 x 102% = R 1,18,728 Depreciation (c) x (d) 1,65,000
allocated = (e) (approx.)
2. Option (c) Unallocated (a) – (e) 15,000
depreciation = (f )
Justification: recognised as
Since the company has a contractual right to return the expense
expired goods at cost + 2%, the entire amount of expired Calculation of normal capacity:
stock in the category at the NRV shall be recognised as Turmeric powder – (150 kg x 1,000 grams) / 200 grams each =
receivables from supplier. 750 packs
Daliya 1,200 kg in the ratio of 2:1 = 800 kg and 400 kg
3. Option (a) 500 grams packs = (800 kg x 1,000 grams) / 500 grams each =
Justification: 1,600 packs
1 kg packs = (400 kg x 1,000 grams) / 1,000 grams each = 400
As per para 10 of IAS 37, a provision is a liability of
packs
uncertain timing or amount. Further, para 14 says, a Total no. of packed units = 2,750 per day x 300 days = 8,25,000
provision shall be recognised when: packs

The Chartered Accountant Student May 2020 17

GFRS Case study
II. Answers of Descriptive Questions
6. As per para 9 of IAS 2, inventories shall be measured at the lower of cost and net realisable value.
Based on the audit observations, below is the calculation of overvaluation of inventory of RK Super Market Ltd. of all stores in
toto:
Category/Item Valuation as per IFRS Valuation done by the company Over-valuation (in R)
principles
Personal care – hand-wash Zero (Refer MCQ 1) 1,18,728 118,728
Due to quantity mismatch (W.N.1) 10,43,457
Not-for-sale items (free) Zero 580,000 5,80,000
Rice (W.N.2) 624,851 675,748 50,627
Grains & pulses (W.N.3) 15,46,063 16,25,103 79,040
Snacks (W.N.4) 623,043 640,559 17,516
Beverages (W.N.5) 979,563 10,05,716 26,153
Total 19,15,521
Working Notes:
1. Valuation difference due to quantity mismatch:
Item code Category Description Reported Actual Difference R Cost per Difference
Qty (1) Qty (2) UoM (3) [(1) – (2)]
x (3)
R-510101 Snacks Biscuits 1,689 boxes 1,589 boxes 100 boxes 1,190 1,19,000
R-511012 Snacks Namkeen 851 boxes 681 boxes 170 boxes 1,890 3,21,300
R-522104 Beverages Coke 1,809 cases 1,691 cases 118 cases 1,300 1,53,400
S-144109 Grains Wheat 1,851 gunny 1,681 gunny 170 gunny 630 1,07,100
bags bags bags
S-143118 Cooking Oil Soyabean 5,140 cans 5,014 cans 126 cans 585 73,710
5 Ltr
D-189107 Hygiene Detergent 2,018 boxes 1,973 boxes 45 boxes 705 31,725
Soap
D-125109 Hygiene Dishwash 1,619 boxes 1,508 boxes 111 boxes 647 71,817
Bars
D-119120 Hygiene Sanitary Pads 1,819 boxes 1,718 boxes 101 boxes 1,200 1,21,200
P-121113 Kitchenware NS Kadhai 561 units 516 units 45 units 329 14,805
P-713114 Baby care Diapers 819 packs 759 packs 60 packs 490 29,400
Total 10,43,457
2. Overvaluation of Rice gunny bags (1,20,018 + 1,13,727 + 1,42,443 + 1,40,101 + 1,24,270) =
Valuation of Rice gunny bags as per IFRS principles R 6,40,559
(1,12,164 + 99,082 + 1,15,039 + 2,98,566) = R 6,24,851 Overvaluation = Valuation done by the company -
Valuation of Rice gunny bags done by the company Valuation as per IFRS
(1,25,174 + 1,02,182 + 1,29,017 + 3,19,105) = R 6,75,478 = R 6,40,559 – R 6,23,043 = R 17,516
Overvaluation = Valuation done by the company - 5. Overvaluation of Beverages packs
Valuation as per IFRS = R 6,75,478 – R 6,24,851 = Valuation of Beverages packs as per IFRS principles
R 50,627 (1,84,212 + 1,93,725 + 2,00,013 + 2,04,750 + 1,96,863) =
3. Overvaluation of Grains and pulses gunny bags R 9,79,563
Valuation of Grains and pulses gunny bags as per IFRS Valuation of Beverages packs done by the companies
principles (3,27,078 + 2,78,730 + 3,63,902 + 2,39,825 + (1,87,523 + 1,98,765 + 2,04,798 + 2,10,925 + 2,03,705) =
3,36,528) = R 15,46,063 R 10,05,716
Valuation of Grains and pulses gunny bags done by the Overvaluation = Valuation done by the company -
companies (3,41,658 + 2,94,975 + 3,77,941 + 2,58,649 + Valuation as per IFRS
3,51,880) = R 16,25,103 = R 10,05,716 – R 9,79,563 = R 26,153
Overvaluation = Valuation done by the company - 7. Para 3 of IAS 10 defines Events after the reporting period
Valuation as per IFRS as those events that occur between the end of the reporting
= R 15,46,063 – R 16,25,103 = R 79,040 period and the date when the financial statements are
4. Overvaluation of Snacks boxes approved by the Board of Directors in case of a company.
Valuation of Snacks boxes as per IFRS principles Further it identifies two types of events –
(1,16,698 + 1,09,051 + 1,39,023 + 1,36,721 + 1,21,550) = (a) Adjusting events – those that provide evidence of conditions
R 6,23,043 that existed at the end of the reporting period; and
Valuation of Snacks boxes done by the companies (b) Non-adjusting events – those that are indicative of
conditions that arose after the reporting period.
18 May 2020 The Chartered Accountant Student
 GFRS Case study
Further, para 8 states that an entity shall adjust the amounts Particulars Working/ Per day For 5 Days
recognized in its financial statements to reflect adjusting reference Daliya Turmeric Daliya Turmeric
events after the reporting period. Raw material 150 x 15,825 79,125
for Turmeric 105.5
Since news for health threat in noodles brand went viral powder
on 29th March, 2019 and Supreme Court ordered ban on Processing 1,200 x 6 7,200 36,000
cost for
2nd April, 2019 ie before the authorisation of the financial Daliya
statements, this is an adjusting event. Therefore, the item of Processing 150 x 25 3,750 18,750
inventory shall be written down to NRV which is zero. cost for
Turmeric
Also, a liability should be recognised for safe disposal of such powder
item to the tune of R 20,000. Packing (1,600 x 4,740 23,700
material for 2.15) +
So, the carrying amount of inventory should be reduced by Daliya (400 x
R 2,48,074 (1,09,051 + 1,39,023) assuming that correction is 3.25)
done as per principles of valuation laid down in IAS 2. Packing
material for
Turmeric
8. Inventory valuation of own-brand products – RK (in R) powder
Particulars Working / Daliya Turmeric 750 x 1.5 1,125 5,625
reference Powder 2,23,200 1,03,500
Raw material for 1,200 kg x 32,700
So, raw material and processing cost of Daliya for 5 days is
processing with 27.25
housewives (1 day 150 kg x R 2,23,200 and
15,825 Raw material and processing cost of Turmeric Powder for
stock) 105.5
Finished Goods (5 (W.N.2) 2,23,200 1,03,500 5 days is R 1,03,500
days stock) 3. Calculation of fixed overheads
Packing material (Given) 21,907 14,148
a. Rent of packing centre = R 60,000 per
Allocation of fixed
month
overhead Number of units packed in a year = 8,25,000 packs (as
R 69,167 (W.N.3) 2:1 46,111 23,056 computed
Total 3,23,918 1,56,529 for MCQ 5)
Working Notes: Number of units packed in a = 8,25,000 / 12

month months = 68,750
1. Stock of finished goods (in R) packs
Particulars Stock per day Stock of 5 days Number of units packed in 5 days = (68,750 packs / 25
Turmeric powder (200 750 3,750 days) x 5 days =
gms pack) 13,750 packs
Daliya (500 gms pack) 1,600 8,000 Rent for 5 days = (R 60,000 / 68,750
Daliya (1 kg pack) 400 2,000 packs) x 13,750
2,750 13,750 packs = R 12,000
2. Raw material, processing cost (paid to housewives) b. Direct labour = (3,25,000/30 days) = R 54,167
x 5 days
and packing material cost for finished goods (in R) c. Depreciation of miscellaneous assets
Particulars Working/ Per day For 5 Days = 13,750 packs x 0.21818 (as computed for MCQ 5)
reference Daliya Turmeric Daliya Turmeric = R 3,000
Raw material 1,200 x 32,700 1,63,500 Total fixed overheads to be = R 12,000 +
for Daliya 27.25 allocated R 54,167 + R 3,000
= R 69,167

CROSSWORD SOLUTION – april 2020

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The Chartered Accountant Student May 2020 19