Referencer For Quick Revision: Final Course Paper-1: Financial Reporting

Referencer for Quick
Revision
Final Course Paper-1: Financial
Reporting
A compendium of subject-wise capsules published in the
monthly journal “The Chartered Accountant Student”
Board of Studies
(Academic)
ICAI
INDEX
Page No. Edition of Students’ Journal Topics
1-4 July 2018 Ind AS 2
5-9 July 2018 Ind AS 16
10-11 July 2018 Ind AS 23
11-14 July 2018 Ind AS 36
15-19 July 2018 Ind AS 38
19-22 July 2018 Ind AS 40
23-28 May 2019 Ind AS 1
28-30 May 2019 Ind AS 34
31-34 May 2019 Ind AS 7
35-36 May 2019 Ind AS 8
36-38 May 2019 Ind AS 10
39-45 May 2019 Ind AS 115
46-47 August 2019 Ind AS 20
48-51 August 2019 Ind AS 105
65-75 November 2020 Ind AS 32
76-89 July 2021 Ind AS 116 – Part I
90-103 August 2021 Ind AS 116 – Part II
104-123 October 2021 Ind AS 103
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
1
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

2
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
3
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.

4
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
Recognised in
profit or loss as Recognised in the Carrying cost of those
Such an asset is reviewed incurred carrying amount of replaced parts/ previous
for impairment as per PPE (if recognisation inspection (as the case may
Ind AS 36 criteria is met) be) is derecognised
5
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

6
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.
7
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.

8
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.
9
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
Interest in respect substantial • power or sale, when
Recognised in accordance with period of generation acquired.
of lease liabilities time to get
Ind AS 116 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
Step 1 : Calculate Capitalisation Rate (CR)*

Expenditure incurred on
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 all outstanding borrowings of the entity (refer Note 3 below for exception) 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.
3. All outstanding borrowings of the entity during the period (as stated in the formula) shall exclude borrowings made specifically for the
purpose of obtaining a qualifying asset until substantially all the activities necessary to prepare that asset for its intended use or sale are
complete
10
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)
Note:
Non-current assets (or disposal groups) classified 1 The concept of materiality applies in identifying whether the
as held for sale (Ind AS 105)
recoverable amount of an asset needs to be estimated.
2 If previous calculations show that an asset’s recoverable amount
Financial Assets (within the scope of Ind AS 109)
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.
*Note: If the disposal costs are not negligible, then the revalued asset will 3 If indication of impairment exists than remaining useful life, the
be impaired if its value in use is less than its revalued amount.
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.

11
FINANCIAL REPORTING
Indicators for impairment
External sources of information Internal sources of information Dividend from a subsidiary, joint venture or
Significant decline in market value (more than associate
normal decline) Obsolescence or physical damage of an asset
Carrying amount of investment (in separate
Significant changes in technology, market, financial statements) > Carrying amounts of
economic or legal environment with adverse Significant changes in use or expected use of investee’s net assets (including associated
effect on entity an asset with adverse effect on entity goodwill) in the consolidated financial
Increase in market interest rates or rate of statements
returns Internal reporting indicating worse economic
performance of asset than expected Dividend > Total Comprehensive Income
Carrying amount of net assets of entity is of investee
more than its market capitalisation
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.
12
FINANCIAL REPORTING
Recognising and Measuring an Impairment S.No. Particular Guidance under Ind AS 36
Loss other than Goodwill B. 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
Impairment loss (IP) 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
No Whether asset is Yes (b) does not include the carrying amount of any
carried at revalued
amount? recognised liability, unless the recoverable amount
of the cash-generating unit cannot be determined
without consideration of this liability.
Whether revaluation  Subtract the carrying amount of the liability to
No surplus exists?
Recognise IP determine both the cash-generating unit’s value in
immediately in profit use and its carrying amount to perform a meaningful
or loss comparison between the carrying amount of the
Yes
cash-generating unit and its recoverable amount.
C. 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
Recognise IP immediately units units.
Recognise IP in OCI to the extent
in profit or loss to the of the amount in the revaluation  The above allocation shall be irrespective of whether
extent loss exceeds the surplus for that same asset other assets or liabilities of the acquiree are assigned
revaluation surplus, if any 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
Note: CGU or a group of CGUs.
1. Any impairment loss of a revalued asset (increased earlier) shall  If goodwill has been allocated to a cash-generating
be treated as a revaluation decrease as per other standard. unit and the entity disposes of an operation within
2. When the amount estimated for an impairment loss is greater that unit, the goodwill associated with the operation
than the carrying amount of the asset to which it relates, an disposed of shall be:
entity shall recognise a liability, if required. a) included in the carrying amount of the operation
3. After the recognition of an impairment loss, the depreciation when determining the gain or loss on disposal; and
(amortisation) charge for the asset shall be adjusted in future b) measured on the basis of the relative values of the
periods to allocate the asset’s revised carrying amount, less its operation disposed of and the portion of the cash-
residual value (if any), on a systematic basis over its remaining generating unit retained, unless the entity can
demonstrate that some other method better reflects
useful life.
the goodwill associated with the operation disposed
4. If an impairment loss is recognised, any related deferred tax
of.
assets or liabilities are determined in accordance with Ind AS 12 D. Timing of  Impairment test for a cash-generating unit to which
by comparing the revised carrying amount of the asset with its impairment goodwill has been allocated shall be performed
tax base. tests annually.
 If some or all of the goodwill allocated to a
Recognition and Measurement of an Impairment cash-generating unit was acquired in a business
combination during the current annual period, that
Loss for a Cash-generating Unit and Goodwill unit shall be tested for impairment before the end of
the current annual period.
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
Sequence for testing of impairment for Cash
generating recoverable amount of the individual asset, an entity Generating Units (CGU)
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).
Separate CGU Group of CGUs
 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 Yes
b) the asset does not generate cash inflows that are Whether CGUs Whether some
contain goodwill? CGUs in the group
largely independent of those from other assets. have goodwill
 In such cases, value in use and recoverable amount, allocated to them?
can be determined only for the asset’s cash- No
generating unit.
No
 If recoverable amount cannot be determined Test CGU for
for an individual asset, an entity identifies the impairment
lowest aggregation of assets that generate largely Firstly, test CGU
independent cash inflows. without goodwill
for impairment
 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. Then, test CGU
 Cash-generating units shall be identified consistently with goodwill for
from period to period for the same asset or types of impairment
assets.

13
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 loss (other than goodwill) impairment loss on loss on the same revalued asset
amount of an asset is recognised immediately a revalued asset is was previously recognised
(other than goodwill) in profit or loss unless the recognised in OCI and in profit or loss, a reversal of
due to reversal of asset is carried at revalued increases the revaluation that impairment loss is also
an impairment loss amount surplus for that asset. recognised in profit or loss.
shall not exceed the
carrying amount
(net of amortisation/ Any increase in excess of After reversal, the depreciation /
depreciation) had no this amount would be a amortisation charge for the asset is
impairment loss been revaluation accounted for adjusted in future periods on a systematic
recognised for the under appropriate Standard basis over its remaining useful life.
asset in prior years.
For disclosure requirements of Ind AS 36 refer the study material.
14
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 of intangible assets asset by the
entity
(Ind AS 116)
Assets arising from employee
benefits (Ind AS 19) Recognition of Intangible Assets – General
Goodwill acquired in a Principles
business combination (Ind AS
103)
It is probable
Deferred acquisition costs and that the
intangible assets, arising from expected future
an insurer’s contractual rights economic
under insurance contracts (Ind benefits
AS 104) (attributable
Non-current intangible assets to the asset)
classified as held for sale (or will flow to the
included in a disposal group entity
that is classified as held for An intangible
sale) (Ind AS 105) asset shall be
recognised if,
Assets arising from contracts and only if
with customers (Ind AS 115)
Amortisation of the intangible
assets arising from service The cost of
concession arrangements in the asset can
respect of toll roads 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

15
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.
16
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.

17
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

public information on estimates of useful
lives of similar assets
If intangible asset arises from If an intangible asset
contractual or other legal rights is a reacquired right
arisen due to a business Technical, technological, commercial or
combination other types of obsolescence
The useful life shall
not exceed the period
of the contractual or Its useful life is the Stability of the industry in which the asset
other legal rights 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
The useful life may be
include renewal periods Expected actions by competitors
shorter depending on
the period over which
the entity expects to
use the asset Level of maintenance expenditure required
Whether the
contractual or Period of control over the asset and legal or
Yes 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
Straight-line
method
The useful life is Method used is selected
Economic factors Legal factors
the shorter of the on the basis of the
Diminishing expected pattern
periods determined balance method
by these factors 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
18
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

in a lessee’s in a lessor’s assets related and mineral
financial financial to agricultural reserves such as
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
accounted for as operating lease
a finance lease

19
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 as a right-of-use asset)
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
Owner-occupied property held by a

lessee as a right-of-use asset
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 a right-of-use Dual Purpose – Unable to split
asset relating to a building held by the entity) and
leased out under one or more operating leases Ind AS 40
Owner Rental
Occupied Income
A building that is vacant but is held to be leased out

under one or more operating leases
It is probable
that the future Costs include •Recognise in
economic • costs the carrying
benefits that incurred amount
Property that is being constructed or developed for future are associated initially to the cost of
use as investment property Investment with the replacing part
investment acquire an owned
property investment of an existing
property will investment
shall be flow to the property and
recognised entity property
• costs when it is
as an asset incurred incurred.
Note: when, and The cost subsequently •The carrying
only when of the to add to, amount of
In some cases, an entity owns property that is leased to, and occupied investment replace part replaced
by, its parent or another subsidiary. The property does not qualify property can of, or service part is
be measured a property derecognised
as investment property in the consolidated financial statements, reliably
because the property is owner-occupied from the perspective of the
group. Note: An investment property held by a lessee as a right-of-use asset
shall be recognised and measured initially at its cost as per Ind AS 116
20
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 owned investment property investment property to the condition necessary for it to be
shall 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
Professional fees
for legal services
Measurement after Recognition
If fair value of
an investment
Property transfer taxes property is not
All entities reliably measurable
on a continuing
shall measure basis, the entity
The cost model
An entity shall the fair value shall make the
to all of its disclosures for the
Other transaction costs adopt as its for the purpose
investment same as well
accounting of disclosure
policy property
only
Note:
1. Investment properties that meet the criteria to be classified as held for
Exchange for Non-monetary Assets sale (or are included in a disposal group that is classified as held for sale)
shall be measured in accordance with Ind AS 105.
2. Investment properties held by a lessee as a right-of-use asset and is not
held for sale is measured as per Ind AS 116.
Entity Sells 3. All other investment properties are measured as per Ind AS 16, under
Buys
cost model.
Investment property Transfers

Asset given up 1) Transfers to, or from, investment property shall be made when,
acquired/received
and only when, there is a change in use, evidenced by:
Measured at a) Commencement of owner-occupation, for a transfer from
investment property to owner-occupied property;
Whether exchange Ind AS 40 Ind AS 16
transaction has
b) Commencement of development with a view to sale, for a
commercial substance
Yes No transfer from investment property to inventories;
Or
the fair value is reliably Ind AS 40 Ind AS 2
measurable? c) End of owner-occupation, for a transfer from owner-
occupied property to investment property; or
Ind AS 16 Ind AS 40
d) Commencement of an operating lease to another party, for a
Whether F.V of transfer from inventories to investment property.
Yes No An Investment property Ind AS 2 Ind AS 40
asset received is
is measured at the 2) Transfers between investment property, owner-occupied
clearly evident?
carrying amount of the
property and inventories do not change the carrying amount of
asset given up
the property transferred and they do not change the cost of that
property for measurement or disclosure purposes.
An Investment An Investment
property is property is
measured at F.V of measured at F.V of
asset received asset given up

21
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 sold for determining when a
derecognised property
the asset performance obligation is satisfied.
• Ind AS 116 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.
22
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
06 May 2019 The Chartered Accountant Student
23
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 Of the preceding period
the 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
Of the preceding period financial statements) the current period’s financial
(comparative information statements
for all amounts reported
in the current period’s At the beginning of the preceding period when
financial statements) • 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.
The Chartered Accountant Student May 2019 07

24
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 • The title of the Ind AS For each period presented,
that the financial with applicable Ind ASs, departed the financial effect of the
statements present a true except departure from a • The nature of the departure on each item in
and fair view. particular requirement to departure the financial statements.
present a true and fair view. • The treatment that the
Ind AS would require
• The reason why that
treatment would be so
misleading; and
• The treatment adopted.
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 Change in When an entity reclassifies comparative amounts,
concern on a going concern basis unless management accounting it shall disclose (including as at the beginning of
 intends to liquidate the entity or policy, the preceding period):
 to cease trading, or retrospective (a) the nature of the reclassification;
 has no realistic alternative but to do so. restatement or (b) the amount of each item or class of items that
m When management has significant doubt reclassification is reclassified; and
upon the entity’s ability to continue as a (c) the reason for the reclassification.
going concern, the entity shall disclose When it is impracticable to reclassify comparative
 the basis on which it prepared the amounts, an entity shall disclose:
financial statements and (a) the reason for not reclassifying the amounts,
 the reason why the entity is not regarded and
as a going concern. (b) the nature of the adjustments that would
To assess going concern basis, management may have been made if the amounts had been
need to consider a wide range of factors like reclassified.
m current and expected profitability, Consistency An entity shall retain the presentation and
m debt repayment schedules and of classification of items in the financial statements
m potential sources of replacement financing. presentation from one period to the next unless:
Accrual basis m An entity shall prepare its financial (a) presentation or classification would be more
of accounting statements, except for cash flow information, appropriate having regard to the criteria for
using the accrual basis of accounting. the selection and application of accounting
m When the accrual basis of accounting is policies in Ind AS 8; or
used, an entity recognises items as assets, (b) an Ind AS requires a change in presentation.
liabilities, equity, income and expenses.
Materiality m Present separately each material class of STRUCTURE AND CONTENT
and similar items.
Identification An entity shall clearly identify each financial
aggregation m Present separately items of a dissimilar
of the financial statement and the notes.
nature or function only if it is material or
statements
required by law (even if it is immaterial). It shall display prominently:
m If a line item is not individually material, it is (a) the name of the reporting entity or other
aggregated with other items either in those means of identification, and any change
statements or in the notes.
m Do not reduce the understandability of its in that information from the end of the
financial statements by preceding reporting period;
 obscuring material information with (b) whether the financial statements are of an
immaterial information; or individual entity or a group of entities;
 aggregating material items that have
different natures or functions.
(c) the date of the end of the reporting
period or the period covered by the set of
Offsetting Offsetting of assets and liabilities or income and
expenses is not allowed unless required or permitted financial statements or notes;
by an Ind AS or except when offsetting reflects the (d) the presentation currency; and
substance of the transaction or other event. (e) the level of rounding used in presenting
Frequency of An entity shall present a complete set of financial amounts in the financial statements.
reporting statements (including comparative information) The rounding off is acceptable as long as
at least annually.
the entity discloses it and does not omit
Comparative Refer chart 3 of Ind AS 1 for minimum and
material information.
information additional comparative information.
25
FINANCIAL REPORTING
Information to m The balance sheet shall present line items m Where there is a breach of a material
be presented and additional line items (including by provision of a long-term loan arrangement
in the balance disaggregating the line items listed in on or before the end of the reporting period
sheet paragraph 54), headings and subtotals. with the effect that the liability becomes
m Presents current and non-current assets, payable on demand on the reporting date,
and current and non-current liabilities, as the entity does not classify the liability
separate classifications in its balance sheet. as current, if the lender agreed, after the
m It shall not classify deferred tax assets reporting period and before the approval
(liabilities) as current assets (liabilities). of the financial statements for issue, not to
demand payment as a consequence of the
breach.
Exception
An entity may present all assets and liabilities in Information Disclose sub-classifications of the line items
order of liquidity but shall disclose the amount to be presented, classified in a manner appropriate to
expected to be recovered or settled presented the entity’s operations.
(a) no more than twelve months after the either in the
reporting period, and balance sheet
(b) more than twelve months after the reporting or in the
period. notes
m An entity is permitted to present some of Statement m The statement of profit and loss shall
its assets and liabilities using a current/non- of Profit and present, in addition to the profit or loss and
current classification and others in order of Loss other comprehensive income sections:
liquidity when this provides information that (a) profit or loss;
is reliable and more relevant. (b) total other comprehensive income;
Current m Classify an asset as current when: (c) comprehensive income for the period,
assets (a) it expects to realise the asset, or intends to being the total of profit or loss and other
sell or consume it, in its normal operating comprehensive income.
cycle; m An entity shall not present any items of
(b) it holds the asset primarily for the income or expense as extraordinary items.
purpose of trading; m An entity shall present an analysis of
(c) it expects to realise the asset within expenses recognised in profit or loss using
twelve months after the reporting period; a classification based on the nature of
or expense method.
(d) the asset is cash or a cash equivalent m An entity shall present additional line items,
unless the asset is restricted from being headings and subtotals in the statement of
exchanged or used to settle a liability for profit and loss, when such presentation is
at least twelve months after the reporting relevant to an understanding of the entity’s
period.
financial performance.
m Classify all other assets as non-current.
Note: The term ‘non-current’ includes tangible, Information to m Present line items for the amounts for the
intangible and financial assets of a long-term be presented period of:
nature. in the other (a) items of OCI classified by nature and
Operating m It is the time between the acquisition of comprehensive grouped into those that:
cycle assets for processing and their realisation in income (OCI) (i) will not be reclassified subsequently
cash or cash equivalents. section to profit or loss; and
m When the entity’s normal operating cycle is (ii) will be reclassified subsequently
not clearly identifiable, it is assumed to be to profit or loss when specific
twelve months. conditions are met.
m The same normal operating cycle applies to (b) the share of OCI of associates and joint
the classification of an entity’s assets and ventures accounted for using the equity
liabilities. method, separated into the share of
items that:
Current m An entity shall classify a liability as current (i) will not be reclassified subsequently
liabilities when: to profit or loss; and
(a) it expects to settle the liability in its (ii) will be reclassified subsequently
normal operating cycle; to profit or loss when specific
(b) it holds the liability primarily for the conditions are met.
purpose of trading; m Disclose the amount of income tax relating to
(c) the liability is due to be settled within each item of OCI, including reclassification
twelve months after the reporting period; adjustments, either in the statement of profit
or and loss or in the notes.
(d) it does not have an unconditional right to m Present items of OCI either
defer settlement of the liability for at least (a) net of related tax effects, or
twelve months after the reporting period. (b) before related tax effects with one
m An entity shall classify all other liabilities as amount shown for the aggregate amount
non-current. of income tax relating to those items.
m An entity classifies some operating items m If an entity elects alternative (b), it shall
like trade payables and some accruals for allocate the tax between the items that
employee and other operating costs (part might be reclassified subsequently to the
of the working capital) as current liabilities profit or loss section and those that will not
even if they are due to be settled more than be reclassified subsequently to the profit or
twelve months after the reporting period. loss section.

26
FINANCIAL REPORTING
Reclassification m When amounts previously recognised in Information m Present, either in SOCE or in the notes,
adjustment other comprehensive income are reclassified to be the amount of dividends recognised as
to profit or loss they are referred as presented in distributions to owners during the period, and
reclassification adjustments. the statement the related amount of dividends per share.
m It is included with the related component of of changes m Changes in an entity’s equity between the
other comprehensive income in the period in equity beginning and the end of the reporting
(SOCE) or in period reflect the increase or decrease in
that the adjustment is reclassified to profit or its net assets during the period except for
loss. the notes
changes resulting from transactions with
m These amounts may have been recognised owners in their capacity as owners (such
in OCI as unrealised gains in the current or as equity contributions, reacquisitions of
previous periods. the entity’s own equity instruments and
m Those unrealised gains must be deducted dividends) and transaction costs directly
from OCI in the period in which the realised related to such transactions.
gains are reclassified to profit or loss to m Retrospective adjustments and retrospective
avoid including them in total comprehensive restatements are not changes in equity but
income twice. they are adjustments to the opening balance
m An entity may present reclassification of retained earnings, except when an Ind AS
adjustments in the statement of profit and requires retrospective adjustment of another
component of equity.
loss or in the notes. m Standard requires disclosure in the statement
m An entity presenting reclassification of changes in equity of the total adjustment
adjustments in the notes presents the items to each component of equity resulting
of OCI after any related reclassification from changes in accounting policies and,
adjustments. separately, from corrections of errors.
m Reclassification adjustments do not arise m These adjustments are disclosed for each
on changes in revaluation surplus or on prior period and the beginning of the period.
reameasurements of defined benefit plans Notes m The notes shall:
since they are recognised in OCI and are not -Structure (a) present information about the basis of
reclassified to profit or loss in subsequent preparation of the financial statements
periods. Changes in revaluation surplus and the specific accounting policies;
may be transferred to retained earnings in (b) disclose the information required by Ind
subsequent periods as the asset is used or ASs that is not presented elsewhere in
when it is derecognised. the financial statements; and
m Reclassification adjustments do not arise (c) provide information that is not presented
if a cash flow hedge or the accounting elsewhere in the financial statements,
but is relevant to an understanding of
for the time value of an option (or the
any of them.
forward element of a forward contract m Present notes in a systematic manner
or the foreign currency basis spread of a m Cross-reference each item in the balance
financial instrument) result in amounts sheet and in the statement of profit and loss,
that are removed from the cash flow hedge and in the statements of changes in equity
reserve or a separate component of equity, and of cash flows to any related information
respectively, and included directly in the in the notes.
initial cost or other carrying amount of Notes - m An entity shall disclose its significant
an asset or a liability. These amounts are Disclosure of accounting policies comprising:
directly transferred to assets or liabilities. accounting (a) the measurement basis (or bases) used in
Information SOCE includes the following information: policies preparing the financial statements; and
to be (a) total comprehensive income for the period, (b) the other accounting policies used that
presented in showing separately the total amounts are relevant to an understanding of the
the statement financial statements.
attributable to owners of the parent and to
of changes m Additionally, it shall disclose, the judgements,
non-controlling interests; apart from those involving estimations,
in equity (b) for each component of equity, the effects of that management has made in the process
(SOCE) retrospective application or retrospective of applying the entity’s accounting policies
restatement; and that have the most significant effect
(c) for each component of equity, a on the amounts recognised in the financial
reconciliation between the carrying amount statements.
at the beginning and the end of the period, m Disclosure of an accounting policy may
separately (as a minimum) disclosing be significant because of the nature of the
changes resulting from: entity’s operations even if amounts for
(i) profit or loss; current and prior periods are not material.
(ii) other comprehensive income; Notes An entity shall disclose information about the
(iii) transactions with owners in their -Sources of assumptions it makes about the future, and other
capacity as owners, showing separately estimation major sources of estimation uncertainty at the
contributions by and distributions uncertainty end of the reporting period, that have a significant
to owners and changes in ownership risk of resulting in a material adjustment to the
interests in subsidiaries that do not carrying amounts of assets and liabilities within
the next financial year. In respect of those assets
result in a loss of control; and
and liabilities, the notes shall include details of:
(iv) any item recognised directly in equity (a) their nature, and
such as amount recognised directly in (b) their carrying amount as at the end of the
equity as capital reserve. reporting period.
27
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.

28
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.
29
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 m for the current interim period. m cumulatively for the m cumulatively for the
current interim m cumulatively for the current current financial year to current financial year to
period. financial year to date. date. date.
m a comparative balance m comparative statements m comparative statement m a comparative statement
sheet as of the end of profit and loss for the for the comparable year- for the comparable year-
of the immediately comparable interim periods to-date period of the to-date period of the
preceding financial (current and year-to-date) of immediately preceding immediately preceding
year. the immediately preceding financial year. 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

30
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.
31
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.

32
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 flows arising from each of the
following activities of a financial
institution may be reported on a net basis:
Cash receipts and payments on behalf Cash receipts and payments for items in (a) Cash receipts and payments for
of customers when the cash flows which the turnover is quick, the amounts the acceptance and repayment of
reflect the activities of the customer are large, and the maturities are short deposits with a fixed maturity date;
rather than those of the entity
(b) The placement of deposits with
and withdrawal of deposits from
Examples of cash receipts and payments other financial institutions; and
Examples of cash receipts and payments
referred to in paragraph 22(b) are advances (c) Cash advances and loans made
referred to in paragraph 22(a) are: to customers and the repayment
(a) The acceptance and repayment made for, and the repayment of:
(a) Principal amounts relating to credit of those advances and loans.
of demand deposits of a bank;
card customers;
(b) Funds held for customers (b) The purchase and sale of investments;
by an investment entity; and and
(c) Rents collected on behalf (c) Other short-term borrowings, for
of, and paid over to, the example, those which have a maturity
owners of properties. period of three months or less.
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.
33
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. Need not apply to an investment in a subsidiary measured at
fair value through profit or loss (FVTPL).
Important points/disclosures
Investing and financing m Shall be excluded from a statement of cash flows.
transactions that do not require
m Disclosed elsewhere in the financial statements.
the use of cash or cash equivalents
Components of cash and cash m Disclose the components of cash and cash equivalents.
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.
Other Disclosures 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.

34
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 When no Ind AS specifically If the change is If the change results providing reliable and
applies to a transaction, applies to a transaction, required by an more relevant information about the effects
other event or condition other event or condition Ind AS of transactions, other events or conditions
on the entity’s financial position, financial
performance or cash flows
The accounting policy(s) Management shall use its
applied to the item shall judgement in developing
be determined as per that and applying an accounting When an entity changes an accounting policy voluntarily, it
Ind AS policy (Refer Note 1) 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.
35
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

36
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.
37
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 The difference between the carrying
appropriately authorised
of the assets to be distributed amount of the assets distributed
/ approved by the m If an entity gives a choice of and the carrying amount of the
relevant authority, eg receiving either a non-cash dividend payable is presented as a
the shareholders or the asset or a cash alternative, separate line item in profit or loss.
management as per the  estimate both the fair
jurisdiction. value of each alternative
and the associated Disclosure
probability of owners An entity shall disclose
selecting each alternative. (a) the carrying amount of the
m At the end of each reporting period dividend payable at the beginning
and at the date of settlement and end of the period; and
 review and adjust the (b) the increase or decrease in the
carrying amount of the carrying amount recognised in the
dividend payable, with period as result of a change in the fair
any changes recognised in value of the assets to be distributed.
equity as adjustments to the
amount of the distribution
If dividend is declared to distribute a non-
m Account for any difference cash asset (non-adjusting event), disclose
between the carrying amount with respect to the asset to be distributed:
of the assets distributed and the (a) its nature;
carrying amount of the dividend (b) its carrying amount and fair value at the
payable on its settlement end of the reporting period; and
 by recognising the difference, (c) if carrying amount and fair value is
if any, in profit or loss. different than the information about
the method(s) used to measure that fair
value.

38
FINANCIAL REPORTING
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
39
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 Multiple Element m If the goods or services are not considered
transfer a series obligation, if the consumption of those Arrangements/ as distinct, those goods or services are
of distinct goods Goods and combined with other goods or services
services by the customers is symmetrical
or services services that are under the contract till the time the entity
i.e. they meet both of the following criteria: not distinct identifies a bundle of distinct goods or
(a) each distinct good or service would meet services.
the criteria to be a performance obligation m The combination would result in
satisfied over time; and accounting of multiple goods or services
(b) In each transfer, same method is used to in the contract as a single performance
obligation.
measure the entity’s progress towards
m An entity may end up accounting for all the
complete satisfaction of the performance goods or services promised in a contract
obligation. as a single performance obligation if the
entire bundle of promised goods and
services is the only distinct performance
obligation identified.

40
FINANCIAL REPORTING
Customer m When an entity grants a customer the Consignment m Revenue generally would not be
options for option to acquire additional goods or Arrangements recognised for consignment arrangements
additional goods services, that option is only a separate when the goods are delivered to the
or services performance obligation if it provides consignee because control has not yet
a material right to the customer. The transferred.
right is material if it results in a discount m Revenue is recognised when the entity
that the customer would not receive has transferred control of the goods to the
without entering into the contract. consignor or the end consumer.
 If the option provides a material right
to the customer, the customer in Principal vs agent m When the entity is the principal in the
effect pays the entity in advance for consideration arrangement, the revenue recognised
future goods or services and the entity is the gross amount to which the entity
recognises revenue when those future expects to be entitled.
goods or services are transferred or m When the entity is acting as an agent, the
when the option expires. revenue recognised is the net amount i.e.
m If the discounted price in the option the amount, entity is entitled to retain in
reflects the stand-alone selling price return for its services under the contract.
(separate from any existing relationship The entity’s fee or commission may be
or contract), the entity is deemed to the net amount of consideration that the
have made a marketing offer rather than entity retains after paying the other party
having granted a material right. the consideration received in exchange
 Account for only when the customer for the goods or services to be provided
exercises the option to purchase the by that party.
additional goods or services. Since the identification of the principal
 Allocate the transaction price to
in a contract is not always clear, Ind AS
performance obligations on a relative
115 provides following indicators that a
stand-alone selling price basis.
 If the stand-alone selling price performance obligation involves an agency
for a customer’s option to acquire relationship:
additional goods or services is not (a) the entity is primarily responsible for
directly observable, an entity shall fulfilling the contract. This typically
estimate it. That estimate shall reflect includes responsibility for the
the discount that the customer would acceptability of the specified good or
obtain when exercising the option, service;
adjusted for both of the following: (b) the entity has inventory risk before
(a) any discount that the customer the specified good or service has been
could receive without exercising transferred to a customer or after transfer
the option; and of control to the customer (for example, if
(b) the likelihood that the option will the customer has a right of return).
be exercised. (c) the entity has discretion in establishing
Long term m It may be appropriate to treat long term prices for the goods or services.
arrangements arrangements as separate one-year
performance obligations, if the contract Non-refundable It is an advance payment for future goods
can be renewed or cancelled by either upfront fees and services and, therefore, would be
party at discrete points in time (that is, at recognised as revenue when those future
the end of each service year). goods and services are provided, even
m Separately account for its rights and though it relates to an activity undertaken
obligations for each period in which the at or near contract inception to fulfil the
contract cannot be cancelled by either contract and the activity does not result in
party. the transfer of a promised good or service
m When the consideration is fixed,
to the customer.
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 Significant

financing
• The consideration promised in a contract with a customer may component
include fixed amounts, variable amounts, or both. Variable
• For the purpose of determining the transaction price, an entity Consideration consideration
shall assume that the goods or services will be transferred to the payable to
customer
customer as promised in accordance with the existing contract Transaction
and that the contract will not be cancelled, renewed or modified. price
• The nature, timing and amount of consideration promised by a
customer affect the estimate of the transaction price. constraining
• When determining the transaction price, an entity shall consider Non-cash estimates
the effects of all of the following: consideration of variable
consideration
41
FINANCIAL REPORTING
Variable consideration 6 Sale with m To account for the transfer of products with
1 Penalties m Accounted for as per the substance of the a right of a right of return (and for some services that
return are provided subject to a refund), an entity
contract.
shall recognise all of the following:
m Where the penalty is inherent in (a) revenue for the transferred products
determination of transaction price, it in the amount of consideration
shall form part of variable consideration. to which the entity expects to be
2 Estimating Estimate an amount of variable consideration entitled (therefore, revenue would
the amount by using either of the following methods: not be recognised for the products
of variable (a) Expected value - expected to be returned);
consideration It is the sum of probability-weighted (b) a refund liability; and
(c) an asset (and corresponding
amounts in a range of possible adjustment to cost of sales) for its right
consideration amounts. to recover products from customers
It will be appropriate if an entity has a on settling the refund liability.
large number of contracts with similar m Promise to stand ready to accept a
characteristics. returned product during the return
(b) Most likely amount – period shall not be accounted for as a
It is the single most likely amount in a performance obligation in addition to the
obligation to provide a refund.
range of possible consideration amounts
m For any amounts received (or receivable)
(i.e. the single most likely outcome of the for which an entity does not expect to be
contract). entitled, the entity shall not recognise
It will be appropriate, if the contract has revenue when it transfers products to
only two possible outcomes. customers but shall recognise those
An entity shall apply one method consistently amounts received (or receivable) as a
throughout the contract. refund liability.
m Subsequently, at the end of each
3 Refund m Recognise a refund liability if the entity reporting period, the entity shall update
liabilities receives consideration from a customer its assessment of amounts for which it
and expects to refund some or all of that expects to be entitled in exchange for
consideration to the customer. the transferred products and make a
m A refund liability is measured at the corresponding change to the transaction
amount of consideration received / price and, therefore, in the amount of
revenue recognised.
receivable for which the entity does not
m An entity shall update the measurement
expect to be entitled (i.e. amounts not of the refund liability at the end of
included in the transaction price). each reporting period for changes
m The refund liability shall be updated in expectations about the amount
at the end of each reporting period for of refunds. An entity shall recognise
changes in circumstances. corresponding adjustments as revenue
(or reductions of revenue).
4 Constraining Include in the transaction price some or all of
m An asset recognised for an entity’s right
estimates an amount of variable consideration estimated to recover products from a customer on
of variable only to the extent that it is highly probable settling a refund liability shall initially
consideration that a significant reversal in the amount be measured by reference to the former
of cumulative revenue recognised will not carrying amount of the product less any
occur when the uncertainty associated with expected costs to recover those products.
the variable consideration is subsequently m An entity shall present the asset separately
resolved. from the refund liability.
m Exchanges by customers of one product for
5 Reassessment At the end of each reporting period, account another of the same type, quality, condition
of variable for changes in the transaction price, if any. and price are not considered returns.
consideration m Return of a defective product in exchange
for a functioning product shall be
evaluated as warranties.
Warranties
Customer has option to purchase separately Customer does not have option to purchase separately
Distinct service, as the entity promises to provide service Warranty provides an assurance that the product complies
in addition to the product’s described functionality with agreed-upon specifications
Account for the promised warranty as a performance

obligation and allocate a portion of the transaction price Account for the warranty in accordance with Ind AS 37
to that performance obligation

42
FINANCIAL REPORTING
Significant Adjust the promised amount of consideration for the (b) a substantial amount of the consideration
financing effects of the time value of money. promised by the customer is variable and
component In assessing whether a contract contains a financing the amount or timing of that consideration
component and whether that financing component varies on the basis of the occurrence or
is significant to the contract, consider both non-occurrence of a future event that is not
(a) the difference, if any, between the amount of substantially within the control of the
promised consideration and the cash selling customer or the entity.
price of the promised goods or services; and (c) the difference between the promised
(b) the combined effect of both of the following: consideration and the cash selling price of
(i) the expected length of time between when the good or service arises for reasons other
the entity transfers the promised goods than the provision of finance to either the
or services to the customer and when the customer or the entity, and the difference
customer pays for those goods or services; between those amounts is proportional to the
and reason for the difference.
(ii) the prevailing interest rates in the relevant
market. Non-cash m measure the non-cash consideration (or promise
Use the discount rate that would be reflected in a consideration of non-cash consideration) at fair value.
separate financing transaction between the entity m And, if it cannot reasonably estimate the
and its customer at contract inception. fair value of the non-cash consideration, it
shall measure the consideration indirectly
After contract inception, an entity shall not update by reference to the stand-alone selling price
the discount rate for changes in interest rates or of the goods or services promised to the
other circumstances.
customer (or class of customer) in exchange
If the combined effects for a portfolio of similar for the consideration.
contracts were material to the entity as a whole, but
if the effects of the financing component were not Subsequent m If the fair value of the non-cash consideration
material to the individual contract, such financing measurement varies after contract inception because of its
component shall not be considered significant and of non-cash form, the entity does not adjust the transaction
shall not be separately accounted for. price for any changes in the fair value of the
consideration
consideration.
Exception m If the fair value of the non-cash consideration
A contract with a customer would not have a promised by a customer varies for reasons other
significant financing component if any of the
than only the form of the consideration, apply
following factors exist:
the guidance on variable consideration and the
(a) the customer paid for the goods or services
in advance and the timing of the transfer of constraint when determining the transaction
those goods or services is at the discretion of the price.
customer.
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.
43
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

44
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. an intangible asset to
financial asset to the extent
that it has a contractual the extent that has a
right to receive cash or contractual right to
another financial asset as receive an intangible asset
described in paragraph 16 as described in paragraph
of Appendix. 17 in Appendix.
45
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.

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
46
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

47
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

the group as a whole, so that the group is measured
1. Assets classified as non-current (as per Ind AS 1), at the lower of its carrying amount and fair value
shall not be reclassified as current assets until they less costs to sell.
meet the criteria to be classified as held for sale as 6. The classification, presentation and measurement
per Ind AS 105. requirements in this Ind AS are applicable to
2. Non-current assets acquired exclusively for resale shall both non-current asset (or disposal group) that is
not be classified as current unless they meet the criteria classified as:
to be classified as held for sale as per Ind AS 105. • held for sale; and
3. Disposal group may be a group of cash-generating • held for distribution to owners.
units, a single cash-generating unit, or part of a 7. This Ind AS specifies the disclosures required in
cash-generating unit. respect of non-current assets (or disposal groups)
4. The group may include any assets and any liabilities classified as held for sale or discontinued
of the entity, including current assets, current operations. Disclosures in other Ind ASs do not
liabilities and assets excluded from the measurement apply to such assets.
requirements of this Ind AS.
48
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.

49
FINANCIAL REPORTING
Recognition of impairment losses and reversals Changes to a plan of sale or to a plan of distribution
to owners
• An entity shall recognise an impairment loss for any
initial or subsequent write-down of the asset (or • If an asset (or disposal group) classified as held for sale
disposal group) to fair value less costs to sell. or as held for distribution to owners previously, no
longer meets the criteria for such classification, then
• An entity shall recognise a gain for any subsequent it shall be ceased to classify as the asset (or disposal
increase in fair value less costs to sell of an asset to group) held for sale or held for distribution to owners
the extent of the cumulative impairment loss that has (respectively).
been recognised previously
• If an entity reclassifies an asset (or disposal group)
• An entity shall not depreciate (or amortise) a non- directly from being held for sale to being held for
current asset while it is classified as held for sale or while distribution to owners, or directly from being held for
it is part of a disposal group classified as held for sale. distribution to owners to being held for sale, then the
change in classification is considered a continuation
• Interest and other expenses attributable to the of the original plan of disposal.
liabilities of a disposal group classified as held for sale
shall continue to be recognised. • 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.
50
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

51
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.
52
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

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

53
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.
54
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
Disclosures
To ensure that the To draw attention to the
financial statements possibility that financial
contain necessary position and profit or loss
disclosures with respect to 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

55
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
56
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 Two Joint venturers - Trade unions, - Supplier,
- If a director or other - If they simply share - Public utilities, - Franchisor,
member of KMP is joint control of JV - Departments and - Distributor or
common between them 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

57
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.
58
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

59
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 Note:
The amount of preference dividends for the period does not
Any item of income or expense which is otherwise include the amount of any preference dividends for cumulative
required to be recognized in profit or loss in preference shares paid or declared during the current period in
accordance with Ind AS is debited or credited to respect of previous periods.
securities premium account/other reserves
60
FINANCIAL REPORTING
Weighted average number of shares (For calculation of Basic EPS) Important points:
For the purpose of calculating basic earnings per share, the number of 1. Contingently issuable shares are treated as outstanding and are
ordinary shares shall be the weighted average number of ordinary shares included in the calculation of basic earnings per share only from the
outstanding during the period. date when all necessary conditions are satisfied (i.e. the events have
occurred).
Weighted average number of equity shares: 2. Shares that are issuable solely after the passage of time are not
Ordinary shares outstanding at the beginning xxxx contingently issuable shares, because the passage of time is a
certainty.
Less: Ordinary shares bought back multiplied by time- 3. Outstanding ordinary shares that are contingently returnable (i.e.
weighting factor* xxxx subject to recall) are not treated as outstanding and are excluded
Add: Ordinary shares issued multiplied by time- from the calculation of basic earnings per share until the date the
shares are no longer subject to recall.
weighting factor * xxxx
Ordinary shares outstanding during the period xxxx Where,
Contingently issuable ordinary shares are ordinary shares issuable for
*The time-weighting factor is the number of days that the shares are little or no cash or other consideration upon the satisfaction of specified
outstanding as a proportion of the total number of days in the period. 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 When Interest
ceases to accrue However, when the overall effect
instrument to ordinary shares is a share repurchase at fair value,
the reduction in the number of
Issued in place of interest or ordinary shares outstanding is
principal on other financial When Interest the result of a corresponding
instruments ceases to accrue reduction in resources
Issued in exchange for the Rights issues

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

61
FINANCIAL REPORTING
Dilution It is a reduction in earnings per share or conversion of all the dilutive potential ordinary shares into
an increase in loss per share resulting from ordinary shares.
the assumption that convertible instruments
are converted, that options or warrants are Important points to be considered:
exercised, or that ordinary shares are issued upon • Potential ordinary shares are weighted for the period they
the satisfaction of specified conditions. are outstanding
Antidilution It is an increase in earnings per share or a • All potential ordinary shares are assumed to be converted
reduction in loss per share resulting from
the assumption that convertible instruments into ordinary shares at the beginning of the period
are converted, that options or warrants are • If not in existence at the beginning of the period, potential
exercised, or that ordinary shares are issued upon ordinary shares are assumed to be converted into ordinary
the satisfaction of specified conditions. shares at the date of its issuance.
Potential It is a financial instrument or other contract • Potential ordinary shares shall be treated as dilutive
ordinary share that may entitle its holder to ordinary shares.
when, and only when, their conversion to ordinary shares
Examples of potential ordinary shares are: would decrease earnings per share or increase loss per
(a) financial liabilities or equity instruments, share from continuing operations.
including preference shares, that are convertible • Potential ordinary shares that are converted into ordinary
into ordinary shares shares during the period are included in the calculation
(b) options and warrants of diluted earnings per share from the beginning of
(c) shares that would be issued upon the the period to the date of conversion; from the date of
satisfaction of conditions resulting from conversion, the resulting ordinary shares are included
contractual arrangements, such as the purchase in both basic and diluted earnings per share.
of a business or other assets.
The formula can be mathematically expressed as follows: Test for determining whether potential ordinary shares are
Dilutive or Antidilutive
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 Will EPS decrease or loss per share increase due to
+ Weighted average number of dilutive potential conversion of potential ordinary shares
ordinary shares
Measurement of Earnings for Diluted EPS:

Basic earnings are adjusted for after-tax effect of changes Yes No
in Profit and Loss that result from conversion of all dilutive
potential ordinary shares.
Dilutive Antidilutive
Measurement of Earnings for Diluted EPS
Consider in Diluted EPS Ignore

Measurement of Earnings for Basic EPS, adjusted for, by the
after-tax effect of:
Note:
• If potential ordinary shares of the subsidiary, joint venture
or associate have a dilutive effect on the basic earnings
Add back any dividends or other items related
per share of the reporting entity, they are included in the
to dilutive potential ordinary shares
calculation of diluted earnings per share
• Dilutive potential ordinary shares shall be determined
Add back any interest recognized in the period
independently for each period presented
related to dilutive potential ordinary shares
• In determining whether potential ordinary shares are
dilutive or antidilutive, each issue or series of potential
Add/Less any other changes in income or
ordinary shares is considered separately rather than in
expense that would result from the conversion
aggregate
of the dilutive potential ordinary shares.
• To maximise the dilution of basic earnings per share,
each issue or series of potential ordinary shares is
Note: considered in sequence from the most dilutive to the
least dilutive, i.e. dilutive potential ordinary shares with
The expenses associated with potential ordinary shares include the lowest ‘earnings per incremental share’ are included
transaction costs and discounts accounted for in accordance with in the diluted earnings per share calculation before those
the effective interest method with a higher earnings per incremental share
• Options and warrants are generally included first because
they do not affect the numerator of the calculation
Calculation of Shares for the purpose of calculating Diluted
Options, warrants and their equivalents
EPS
Existing weighted average number of ordinary shares + Weighted Options, warrants and their equivalents are financial instruments
average number of ordinary shares that would be issued on the that give the holder the right to purchase ordinary shares.
62
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

63
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

diluted earnings per share and reconciliation of the
amount used to profit or loss
Increases as a result of Decreases as a result of a
a capitalisation, bonus reverse share split
issue or 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. 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
Note:
1. Basic and diluted earnings per share of all periods presented
shall be adjusted for the effects of errors and adjustments Description of ordinary share transactions or
resulting from changes in accounting policies accounted for potential ordinary share transactions that occur
retrospectively. after the reporting period and that would have
2. An entity does not restate diluted earnings per share of any changed significantly the number of ordinary shares
prior period presented for changes in the assumptions used or potential ordinary shares outstanding at the end
in earnings per share calculations or for the conversion of of the period if those transactions had occurred
potential ordinary shares into ordinary shares. before the end of the reporting period
64
FINANCIAL REPORTING
CA FINAL - PAPER 1 - FINANCIAL REPORTING
This capsule in Final Paper 1 Financial Reporting is fifth in the series. Many of the Ind AS have already been covered in the capsules
on Financial Reporting published in July, 2018, May, 2019, August, 2019 and October, 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 significant provisions of Ind AS 32 through pictorial/tabular presentations for better understanding
and quick revision.
FINANCIAL INSTRUMENTS
Overview of standards providing guidance on Scope of Ind AS 32
financial instruments Applied by all entities to all types of financial instruments
Exceptions:
Financial Instruments
Interests in subsidiaries, associates or joint ventures that
are accounted for in accordance with Ind AS 110, Ind AS
27, or Ind AS 28
Note: Entities shall apply this Standard to all derivatives
linked to interests in subsidiaries, associates or joint
Ind AS 32 ‘Financial Ind AS 107 ‘Financial
Instruments:
Ind AS 109 ‘Financial
Instruments:
ventures
Instruments’
Presentation’ Disclosures’
Employers’ rights and obligations under ‘Employee
benefit plans’ to which Ind AS 19 applies
Disclosures
Classification Classification Insurance contracts as defined in Ind AS 104
as Liability vs and re- Exception 1: Derivatives that are embedded in insurance
Equity classification contracts -if accounted separately by the issuer, as
Of
Initial
required by Ind AS 109.
Financial
Compound Measurement Exception 2: Financial guarantee contracts -if the issuer
liability
Financial applies Ind AS 109 in recognising and measuring the
Instruments Measurement contracts. However, issuer can elect applying Ind AS 104
Subsequent Of in recognising and measuring them
Offsetting a Measurement Financial
Financial asset
asset Financial instruments within the scope of Ind AS 104
and a Financial
liability Recognition (because they contain a discretionary participation
and de- feature). However, exemption is limited to paragraphs
Presentation recognition 15– 32 and AG25–AG35 which relates to the distinction
of Interest, between financial liabilities and equity instruments.
dividends, Impairment Note: Ind AS 32 applies to derivatives that are embedded
losses and gains in these instruments
Hedging
Derivative Instruments
and hedge Financial instruments, contracts and obligations under
accounting share-based payment transactions to which Ind AS 102
Hedged items applies,
Exception 1: Contracts within scope of paras 8-10 of Ind
AS 32
INDIAN ACCOUNTING STANDARD 32: Exception 2: Treasury shares purchased, sold, issued
‘FINANCIAL INSTRUMENTS: PRESENTATION’ or cancelled in connection with employee share option
plans, employee share purchase plans, and all other share-
based payment arrangements to which paras 33, 34 of Ind
Objective of Ind AS 32 is to AS 32 applies
Establish Establish Classify Classify Circumstamces
principles principles financial related in which
for
presenting
for
offsetting
instruments,
from the
interest,
dividends,
financial assets
and financial
Summary of the transaction outside the
financial financial perspective losses and liability should scope Financial Instruments:
instruments assets and of the issuer gains be offset S. Particulars Covered Covered Applicable
as liabilities financial into No. under under Ind AS
or equity liabilities -financial Ind AS 109 Ind AS 32
assets, 1 Interest in subsidiaries No No Ind AS 27
-financial (At Costs)
liabilities 2 Interests in associates No No Ind AS 27
and (At Costs)
-equity 3 Interest in joint ventures No No Ind AS 27
instruments (At Costs)
4 Rights and obligations No No Ind AS 116
under leases
Note: Principles in Ind AS 32 complement the principles for 5 Employers' rights and No No Ind AS 19
recognising and measuring financial assets and financial liabilities in obligations under
Ind AS 109 and for disclosing information about them in Ind AS 107. employee benefit plans
06 November 2020 The Chartered Accountant Student
65
FINANCIAL REPORTING
S. Particulars Covered Covered Applicable Contracts need not
No. under under Ind AS be in writing and
Ind AS 109 Ind AS 32 may take a variety What are Financial Any assets or
6 Rights and obligations No No Ind AS 104 of forms Instruments? liabilities that are not
under an insurance
contractual are not
contract An agreement financial assets or
7 Forward contract arising No No Ind AS 104 between two or Any contract financial liabilities.
in case of business more parties that Example: Income
combination • has clear taxes are a statutory
8 Loan commitment other No No Ind AS 37 economic obligation
than covered under Ind consequences and That gives rise
AS 109 and Ind AS 32 • is enforceable by
9 Shared based payments No No Ind AS 102 law
10 Reimbursement right in No No Ind AS 37
respect of provision
11 Rights and obligations No No Ind AS 115 To one entity’s To another entity’s
under revenue
for contracts with OR
customers
12 Interest in subsidiaries Yes Yes Ind AS 109 Financial asset Financial liability Equity instrument
/ Associates / Joint
venture (At Fair Value)
Scope of ‘Contract to Buy or Sell a Non-Financial Item’

What are
Financial Assets?
Ind AS 32 is applicable when the contract Ind AS 32 is not
(including written option) is settled applicable when
or or
Net in By another By exchanging When an entity Contract is entered Equity Contract (Derivative or Non-
cash financial financial irrevocably into and continue instrument A contractual Derivative) settled with variable
instrument instruments designates to be held for the Cash of another amount of entity’s own equity
right:
the contract purpose of the entity instruments
as measured receipt or delivery of
at fair value a non-financial item
through profit in accordance with
As if the contract was or loss as per the entity’s expected To receive cash To exchange financial Exception:
a financial instrument para 2.5 of Ind purchase, sale or or another assets or financial Entity’s own equity
AS 109 usage requirements financial asset OR liabilities with another instruments do not
from another entity under conditions include
entity that are potentially • puttable financial
Even if it was entered into for the purpose of the receipt or favourable to the entity instruments
delivery of a non-financial item in accordance with the entity's classified as equity
expected purchase, sale or usage requirements instruments
The ability A contingent right and • instruments that
to exercise a obligation meets the impose on the
Note: This designation is available only at inception of the
contractual definition of financial asset entity an obligation
contract and only if it eliminates or significantly reduces a
right or to satisfy and financial liability, even to deliver to
recognition inconsistency which arise from not recognising
a contractual though such assets and another party a
that contract under Ind AS 32
obligation may be liabilities are not always pro rata share of
absolute or it may recognized in the financial the net assets of
Ways in which a contract to buy or sell a non-financial item can be settled net in be contingent on statements. For eg.: A the entity only on
cash or another financial instrument or by exchanging financial instruments. occurrence of one lender may be provided liquidation and are
or more future with a financial guarantee classified as equity
events, not wholly by a party (‘guarantor’) on instruments, or
within the control behalf of borrower, entitling • instruments that
When the When the ability to settle When, for similar When the
of either party to to recover the outstanding are contracts for
terms of the net in cash or another contracts, the non-
the contractual dues from the guarantor the future receipt
contract permit financial instrument, or entity has a financial
arrangement if the borrower were to or delivery of the
either party to by exchanging financial practice of taking item that is
default, etc. entity’s own equity
settle it instruments, is not delivery of the the subject
• net in cash or explicit in the terms of the underlying and of the instruments
• another contract, but the entity selling it within contract
financial has a practice of settling a short period is readily Important Points
instrument or similar contracts in the after delivery convertible • Physical assets (such as inventories, property, plant and
• by said manner for the purpose to cash equipment), right-of-use assets and intangible assets (such as
exchanging (whether with the of generating a patents and trademarks) are not financial assets.
financial counterparty, by entering profit from short- • Assets (such as prepaid expenses) for which the future economic
instruments into offsetting contracts term fluctuations benefit is the receipt of goods or services, rather than the right to
or by selling the contract in price or receive cash or another financial asset, are not financial assets.
before its exercise or lapse) dealer's margin • ‘Perpetual’ debt instruments (such as ‘perpetual’ bonds,
debentures and capital notes) normally provide the holder with
the contractual right to receive payments on account of interest
Note: Such Contracts on which Ind AS 32/Ind AS 109 is applicable are at fixed dates extending into the indefinite future, either with
considered to be derivatives while those contracts that are not covered no right to receive a return of principal or a right to a return of
under the scope of Ind AS 32 are considered as executory contracts. principal under terms that make it very unlikely or very far in the
future. The holder and issuer of the instrument have a financial
asset and a financial liability, respectively.
The Chartered Accountant Student November 2020 07

66
FINANCIAL REPORTING
TEST YOUR KNOWLEDGE What are Financial Liabilities?
Particulars Whether Remarks
Financial A contractual Contract (Derivative or Non-
Asset (FA) obligation Derivative) settled with variable
or not? amount of entity’s own equity
instruments
Investment in bonds FA Contractual right to receive cash
debentures
Loans and FA Contractual right to receive cash To deliver cash To exchange financial
receivables or another assets or financial
financial asset OR liabilities with another
Deposits given FA Contractual right to receive cash to another entity under conditions
entity that are potentially
Trade & other FA Contractual right to receive cash
unfavourable to the entity
receivables
Cash and cash FA Specifically covered in the
equivalents definition
Exception:
Bank balance FA Contractual right to receive cash
Investments in FA Equity instrument of another Rights, options or warrants to acquire a fixed number of the
equity shares entity entity’s own equity instruments for a fixed amount of any
currency are equity instruments if the entity offers the rights,
Perpetual debt FA Such instruments provide the
options or warrants pro rata to all of its existing owners of
instruments contractual right to receive
the same class of its own non-derivative equity instruments
Eg. perpetual interest for indefinite future or a
bonds, debentures right to return of principal under
and capital notes. terms that make it very unlikely The equity conversion option embedded in a convertible
or very far in the future bond denominated in foreign currency to acquire a fixed
Physical assets No Control of such assets does not number of the entity’s own equity instruments if the exercise
create a present right to receive price is fixed in any currency
Eg. inventories,
property, plant and cash or another financial asset
equipment etc. Puttable financial instruments that are classified as equity
Right to use assets No Control of such assets does not instruments as per paras 16A and 16B
Eg. Lease vehicle create a present right to receive
etc. cash or another financial asset
Instruments that impose on the entity an obligation to deliver
Intangibles No Control of such assets does not to another party a pro rata share of the net assets of the entity
Eg. Patents, create a present right to receive only on liquidation and are classified as equity instruments as
trademark etc. cash or another financial asset per para 16C and 16D, or
Prepaid expenses No These instruments provide
Eg. Prepaid future economic benefit in the Instruments that are contracts for the future receipt or
insurance, prepaid form of goods or services, rather delivery of the entity’s own equity instruments
rent etc. than the right to receive cash
Advance given for No These instruments provide "Note: An instrument that meets the definition of a financial
goods and services future economic benefit in the liability is classified as an equity instrument if it has all the features
form of goods or services, rather and meets the conditions in paragraphs 16A and 16B or paragraphs
than the right to receive cash 16C and 16D."
TEST YOUR KNOWLEDGE

Particulars Whether Financial Remarks
Liability (FL)
or not?
Loans payable or bank loan FL Contractual obligation to pay cash / bank
Trade and other payables FL Contractual obligation to pay cash / bank
Bills payable / acceptance FL Contractual obligation to pay cash / bank
Deposits received FL Contractual obligation to pay cash / bank
Mandatory redeemable preferences FL Contractual obligation to pay cash / bank
shares
Financial guarantee given FL Contractual obligation to pay cash, due
to the occurrence of certain events
67
FINANCIAL REPORTING
 Settlement in own equity instruments is equity
Equity Instrument classified only if it’s a fixed-for-fixed transaction,
ie, issue of fixed number of shares and involves a
fixed amount of cash or other financial asset
Any contract that  Where an entity enters into a non-derivative contract
to issue a fixed number of its own equity instruments
in exchange for a fixed amount of cash (or another
financial asset), it is an equity instrument of the
Settlement entity. But this does not apply for instruments that
Evidences a residual interest in the assets of an entity
in own are equity classified being a puttable instrument or
after deducting all of its liabilities
equity other instrument entitling the holder to pro-rata
instruments share in net assets that meet specified criteria
 However, if such a contract contains an obligation for
the entity to pay cash (or another financial asset), it
The instrument is an equity instrument if, and only if, both also gives rise to a liability for the present value of the
conditions (a) and (b) below are met: redemption amount. For example: a forward contract
entered into by an entity to repurchase fixed number
of its own shares for a fixed amount of cash gives rise
to a financial liability to be recorded at present value
of redemption amount
An issuer of non-puttable ordinary shares assumes a liability when:

(b) If the instrument will or may
(a) The instrument • it formally acts to make a distribution and
be settled in the issuer’s own
includes no contractual • becomes legally obliged to the shareholders to do so
equity instruments, it is:
obligation:
(i) A non-derivative that includes
(i) To deliver cash or another
no contractual obligation for
financial asset to another This may be the case following the:
the issuer to deliver a variable
entity; or • Declaration of a dividend or
number of its own equity
(ii) To exchange financial instruments; or • When the entity is being wound up and any assets remaining after the
assets or financial satisfaction of liabilities become distributable to shareholders
(ii) A derivative that will be settled
liabilities with another
only by the issuer exchanging
entity under conditions
a fixed amount of cash or
that are potentially Example: When the dividend is approved by shareholders in AGM, the
another financial asset for a
unfavourable to the Company has taken an obligation to distribute dividend to its shareholders
fixed number of its own equity
issuer and hence, it is a contractual obligation meeting the definition of financial
instruments
liability
Fixed-for-fixed
transaction!
Examples of equity instruments include:
Note: A contractual obligation, including one arising from a derivative Non-puttable ordinary shares, for example: equity shares issued by companies
financial instrument, that will or may result in the future receipt or
delivery of the issuer’s own equity instruments, but does not meet
Some puttable instruments (if they meet requisite criteria and are not classified
conditions (a) and (b) above, is not an equity instrument. as financial liabilities)
Some instruments that impose on the entity an obligation to deliver to another

party a pro rata share of the net assets of the entity only on liquidation (if they
meet requisite criteria and are not classified as financial liabilities)
The key characteristics of an equity instrument have been further
explained as follows: Some types of preference shares (where repayment and distribution is at the
discretion of the Issuer);
 A key characteristic of equity instruments is that they
carry no contractual obligation throughout for any
payment or distribution towards the holders of such Warrants or written call options that allow the holder to subscribe for or
instruments. purchase a fixed number of non-puttable ordinary shares in the issuing entity
in exchange for a fixed amount of cash or another financial asset.
 However, following type of instruments as an
No exception are ‘equity’ classified even if they contain
contractual  Other instruments convertible into fixed number of equity shares, etc.
an obligation to deliver cash or other financial asset,
obligation provided certain requisite criteria are met –
1. Puttable financial instruments that meet certain Important Points
conditions
2. An instrument, or a component of an instrument,
• The classification of a financial instrument under Ind AS 32
that contains an obligation for the issuing entity is done from the perspective of the issuer and not from the
to deliver to the holder a pro rata share of the net perspective of the holder
assets of the issuing entity only on its liquidation • For some financial instruments, although their legal form may be
equity, the substance of the arrangements may be that they are
liabilities. Paragraphs 11 and 16 of Ind AS 32 provides guidance
to distinguish a financial liability from an equity instrument
• A preference share, for example, may display either equity or
liability characteristics depending on the substance of the rights
attaching to it

68
FINANCIAL REPORTING
Comparative Table For Classifying Financial Liabilities And The Flowchart Below Further Summarises The Distinction
Equity Instruments From The Perspective Of The Issuer Between The Definitions Of A Financial Liability And Equity:
No Not a financial instrument, account

Financial liability (Ind AS 32.11) Equity (Ind AS 32.16) Is there a contractual obligation?
for under relevant standard
A financial instrument that fulfils A financial instrument that fulfils Yes
either of (A) or (B) below: both (A) and (B) below:
Obligation to deliver cash or Yes
Condition (A): Condition (A): another financial asset?
An instrument that is a An instrument that contains no No
contractual obligation: contractual obligation:
Obligation to exchange
i. to deliver cash or another i. to deliver cash or another financial assets or liabilities Yes
financial asset to another financial asset to another under potentially unfavourable Financial liability
entity; or entity; or conditions
ii. to exchange financial assets or ii. to exchange financial assets or No
financial liabilities with another financial liabilities with another Yes
entity under conditions that are entity under conditions that are (A) Obligation to issue own
equity instruments, AND Measured at Measured at
potentially unfavourable to the potentially unfavourable to the (B) Either of the consideration Amortised cost Fair value
entity entity received/receivable
or number of equity
Condition (B): Condition (B): instruments is VARIABLE
An instrument that will or may be An instrument that will or may be • Cost recorded in the income
No, this implies statement
settled in the entity's own equity settled in the entity's own equity
• Impact on net profit / OCI
instruments and is: instruments and is:
(A) Obligation to issue own
i. A non-derivative for which the i. a non-derivative that includes equity instruments, AND Hence
entity is or may be obliged no contractual obligation for (B) Both of the consideration Equity instrument
to deliver a variable number the issuer to deliver a variable received / receivable
of the entity's own equity number of the entity's own and number of equity
instruments are FIXED
instruments; or equity instruments; or Carried at cost
ii. A derivative that will or may ii. a derivative that will or may be
be settled other than by the settled only by the exchange
exchange of a fixed amount of a fixed amount of cash or All transactions recorded directly in equity
of cash or another financial another financial asset for a
asset for a fixed number of the fixed number of the entity's
entity's own equity instruments own equity instruments
No Contractual Obligation to Deliver Cash or Another Financial Asset
A critical feature in differentiating a financial liability from an equity instrument is the existence of
a contractual obligation of the issuer either to deliver cash or another financial asset to the holder
or to exchange financial assets or financial liabilities with the holder under conditions that are
potentially unfavourable to the issuer
There are very limited exceptions to this principle in the form of “puttable instruments” and
“obligations arising on liquidation”
The financial instrument is a financial liability even when the amount of cash or other financial
assets is determined on the basis of an index or other item that has the potential to increase or
decrease
If an entity does not have an unconditional right to avoid delivering cash or another financial asset
to settle a contractual obligation, the obligation meets the definition of a financial liability
A financial instrument that does not explicitly establish a contractual obligation to deliver cash
or another financial asset may establish an obligation indirectly through its terms and conditions
69
FINANCIAL REPORTING
Settlement In The Entity’s Own Equity Instruments
To recapitulate: A financial instrument is classified as a liability not just when there is an obligation to deliver cash or another financial
asset, it is sometimes so classified even when the entity’s obligation is to settle the instrument through delivery of its own equity instruments.
If an entity has a contractual right or obligation to receive or deliver a number of its own shares or other equity instruments that varies so
that the fair value of the entity's own equity instruments to be received or delivered equals the amount of the contractual right or obligation,
such a contract is a financial liability.
Such a contractual right or obligation may be for a fixed amount or an amount that fluctuates in part or in full in response
to changes in a variable other than the market price of the entity's own equity instruments (eg an interest rate, a commodity
price or a financial instrument price)
The number of equity instruments to be delivered could vary as a result of entity’s own share price.
A contract that will be settled by the entity (receiving or) delivering a fixed number of its own equity instruments in exchange
for a fixed amount of cash or another financial asset is an equity instrument
The above requirements are summarised in the table below:
S.no. 2 in table S. Consideration Number of own equity Classification and rationale

is also called No. for financial instruments to be
“fixed for fixed” instrument issued in settlement
test for equity
classification 1 Fixed Variable Financial liability – own equity instruments are being used as
currency to settle an obligation for a fixed amount
i.e. fixed amount
of cash or 2 Fixed Fixed Equity – issuer does not have an obligation to pay cash and
other financial holder is not exposed to any variability
asset for fixed 3 Variable Fixed Financial liability – though issuer does not have an obligation
number of to pay cash, but holder is exposed to variability
own equity
instruments 4 Variable Variable Financial liability – though issuer does not have an obligation
to pay cash, but both parties are exposed to variability
Another point to note is a fine distinction highlighted in the definition of financial liability and equity, as mentioned in the paragraph
“Definitions – financial liability and equity”. Being mirror images of each other, for simplicity sake, let us look at condition (B) in the
definition of “financial liability”:
“An instrument that will or may be settled in the entity's own equity instruments and is:
i. a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity's own equity instruments; or
ii. a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed
number of the entity's own equity instruments”
In short, the treatment can be explained as follows
Conversion feature fails “fixed No Equity instrument – consideration

for fixed” test? received is credited to equity
Yes
Conversion feature is No Can be subsequently measured

derivative? at amortised cost
Yes
Subsequently measured at fair value

with fair value changes recognised
in profit or loss

70
FINANCIAL REPORTING
Important Points Preference Shares
• Changes in the fair value of a contract arising from variations
in market interest rates that do not affect the amount of
cash or other financial assets to be paid or received, or the In determining whether a preference share is a financial
number of equity instruments to be received or delivered, on liability or an equity instrument, an issuer assesses the
settlement of the contract do not preclude the contract from particular rights attached to the share to determine
being an equity instrument whether it exhibits the fundamental characteristic of a
financial liability or an equity instrument
• Any consideration received (such as the premium received
for a written option or warrant on the entity’s own shares) is
added directly to equity
Redeemable Preference shares Non-Redeemable Preference shares
• Any consideration paid (such as the premium paid for a
purchased option) is deducted directly from equity.
• Changes in the fair value of an equity instrument are not Redemption Redemption Redemption When distributions to
recognised in the financial statements at a specified at option of at option of holders of the preference
date Holder Issuer shares, whether cumulative
or non-cumulative, are at
Contracts settled in own equity instruments but classified the discretion of the issuer
as ‘financial liability’ (where equity instrument is treated as
currency):
Classified as a Classified as equity The shares are equity
Terms Evaluation under Ind AS 32 financial liability instrument instruments
Non • A contract that will be settled in a variable

derivative number of entity's own shares whose value
contract equals a fixed amount is a financial liability, The potential inability of an An obligation may arise, when the
because the entity is under an obligation to pay issuer to redeem a preference issuer of the shares exercises its
a fixed amount that is settled through equity share when contractually option, (usually by formally notifying
required either because of a lack the shareholders of an intention to
instruments (similar to settlement in currency)
of funds, a statutory restriction redeem the shares), at which time
• Similarly, a contract that will be settled in a
or insufficient profits or reserves, this instrument shall be reclassified
fixed number of the entity's own shares, but the does not negate the obligation from ‘equity’ to ‘financial liability’
rights attaching to those shares will be varied
so that the settlement value equals a fixed
amount or an amount based on changes in an Points to be noted:
underlying variable, is a financial asset or a • The contractual terms determine the nature of instrument.
financial liability • Any historical trend or ability of the Issuer does not affect the
classification of an instrument as ‘equity’ or ‘financial liability’.
Derivative • A contract that will be settled in a variable • The classification of a preference share as an equity instrument or a
contract number of the entity's own shares whose value financial liability is not affected by
equals an amount based on changes in an (a) A history of making distributions
underlying variable (eg a commodity price) is a (b) An intention to make distributions in the future
financial asset or a financial liability. (c) A possible negative impact on the price of ordinary shares of the
An example is a written option to buy gold that, issuer if distributions are not made
if exercised, is settled net in the entity's own (d) The amount of the issuer's reserves
instruments by the entity delivering as many of (e) An issuer's expectation of a profit or loss for a period or
those instruments as are equal to the value of (f) An ability or inability of the issuer to influence the amount of its
the option contract profit or loss for the period
Classification / Evaluation of Preference Shares Based on Distribution on and of Preference Shares

Nature Dividend Terms Evaluation Classification Accounting
whether at the
option of the issuer
Mandatory Non - • Dividend – Liability Liability Amortized costs
Redeemable Discretionary • Redemption – Liability
Preference
Discretionary • Dividend – Equity Compound FI Split Accounting into liability
Shares
• Redemption – Liability and Equity component
• Non Non - • Dividend – Liability Liability Amortized costs
redeemable Discretionary • Fixed to Fixed – Not met – Liability
• Convertible
• Dividend – Liability Compound FI Split Accounting into liability
• Fixed to Fixed – Met – Equity and Equity component
Discretionary • Dividend – Equity Compound FI Split Accounting into liability
• Fixed to Fixed – Not met – Liability and Equity component
• Dividend – Equity Equity • Fair value
• Fixed to Fixed – Met – Equity • No re-measurement
71
FINANCIAL REPORTING
Puttable Instruments
It gives the to put the instrument for cash or another is automatically put
OR
holder the right back to the issuer financial asset back to the issuer
phrase “put on the occurrence the death or

back to the of an uncertain OR retirement of the
issuer” refers to
future event instrument holder
redemption of
the instrument
A puttable financial instrument includes a contractual obligation for the issuer to repurchase
or redeem that instrument for cash or another financial asset on exercise of the put
Note: If the holder has a right, but not an obligation to require the issuer to redeem the
instrument, it is referred to as “put option
As per the principle, it shall be classified as financial liability. However, it would be classified as
Equity, subject to fulfillment of certain conditions
Exception to the definition of a financial liability ie when a puttable financial

instrument is classified as an equity instrument if it has ALL the following features:
1. It takes a 2. It is 3. All 4. Apart from 5. Total expected 6. The issuer

pro rata share subordinate financial the contractual cash flows must have no
of the entity’s to all other instruments obligation for attributable to other financial
net assets in classes of in that class of the issuer to the instrument instrument or
the event of instrument instruments repurchase or over the life of contract that has:
the entity’s have identical redeem the the instrument • total cash flows
liquidation features instrument for are based on same terms
cash or another substantially on as point 5, with
financial asset, the: • the effect of
there are no • profit or loss, substantially
other contractual • change in the restricting
For example, they obligations: recognised net or fixing the
must all be puttable, • to deliver cash assets or residual return
That is, in its present and the formula or or another • change in the to the puttable
form, it has no other method used to financial asset fair value of the instrument
priority over other calculate the repurchase to another recognised and holders
claims to the entity's or redemption price entity, or unrecognised
assets on liquidation is the same for all • to settle net assets
(entity will need to instruments in that in variable of the entity over
assume liquidation on class n u m b e r the life of the
date of classification) of entity’s instrument
own equity
instruments
with another
entity
Or say, if the cash flows are attributable

In other words, there are no other
to any factors other than the three
features of the instrument which could
listed above, ex., an index, the
satisfy the definition of “financial
puttable instrument will fail the equity
liability”
classification

72
FINANCIAL REPORTING
Carve Out in Ind AS 32 from IAS 32
As per IFRS Carve out
As per accounting treatment prescribed under IAS 32, equity In Ind AS 32, an exception has been included to the definition of
conversion option in case of foreign currency denominated ‘financial liability’ in paragraph 11 (b) (ii), whereby conversion option
convertible bonds is considered a derivative liability which is in a convertible bond denominated in foreign currency to acquire a
embedded in the bond. Gains or losses arising on account of change fixed number of entity’s own equity instruments is classified as an
in fair value of the derivative need to be recognised in the statement equity instrument if the exercise price is fixed in any currency.
of profit and loss as per IAS 32.
Obligations Arising on Reclassification of Puttable Instruments / Obligations

Liquidation Arising on Liquidation
Some financial instruments include a contractual obligation for the Classification Re-Classification
issuing entity to deliver to another entity a pro rata share of its net
assets only on liquidation
As an Equity instrument is Is to be done from the date,
to be done, from the date when the instrument ceases
when the instrument has all to have all the features
The obligation the features and meets the or meet all the specified
arises because: specified conditions conditions
Accounting for reclassification:

Liquidation either is certain Is uncertain to occur but
to occur and outside the is at the option of the
OR
control of the entity (for instrument holder Reclassification Reclassification Measurement Recognition
example, a limited life entity) from to of difference
in carrying
amount and
measurement
As per the principle, it shall be classified as financial liability. of reclassified
However even then it would be classified as Equity, subject to instrument
fulfillment of certain conditions Financial Equity At the carrying -N.A.-
liability value of the
financial
Note: The conditions number 1-3 and 6 given for puttable financial liability at
instrument (to be classified as equity instruments) are also the date of
applicable in case of Instruments, or components of instruments, reclassification
that impose on the entity an obligation to deliver to another party a Equity Financial At fair value of In equity
pro rata share of the net assets of the entity only on liquidation, for liability the instrument
classification as an equity instruments at the date of
reclassification
Contingent Settlement Provisions
A financial instrument may require an entity to deliver cash or another financial asset, or
settle it in some other way that would require it to be classified as a financial liability, but
only in the event of occurrence or non-occurrence of some uncertain future event
The issuer of such an instrument does not have the unconditional right to avoid delivering cash or
another financial asset (or otherwise to settle it in such a way that it would be a financial liability)
However, there are some exceptions where it is classified as equity
Note:
The occurrence or non-occurrence of uncertain future events beyond the control of both the issuer
and the holder of the instrument might include:
• A change in a stock market index
• A change in consumer price index
• A change in interest rate or taxation requirements, or the issuer’s future revenues
• A change in net income or debt-to-equity ratio
73
FINANCIAL REPORTING
Classification of Contingent Settlement Compound Financial Instruments
Provisions into Liability or Equity
A compound financial instrument has a legal form
of a single instrument, whereas the substance is that
Is the contingent event within Yes both liability and equity instrument exist
the control of the issuer?
A compound financial instrument is a non-
No derivative financial instrument that, from the
issuer's perspective, contains both a liability and
an equity component
Assess whether the part of
the contingent settlement No
provision that indicates liability The issuer of a non-derivative financial instrument
classification is genuine should evaluate the terms of the financial instrument
to determine whether it contains both a liability and
Yes an equity instrument
Can the issuer be required to Example: In convertible bond, a bond holder

settle the obligation in cash or can either be paid cash at maturity or get fixed
Yes Equity
another financial asset only in number of shares in exchange of bond at maturity.
classification It is compound financial instrument as it contains 2
the event of the liquidation of
the issuer? elements viz Liability and Equity
No Convertible bond
Does the instrument have

all the features and meet all Liability component Equity component
the conditions relating to Yes
the exceptions for puttable
instruments and obligations Reason: Issuer has the Reason: A call option
arising on liquidation? obligation as per contractual granting the holder the right,
arrangement to deliver cash for a specified period of time,
or another financial asset to convert it into a fixed
No
number of ordinary shares of
the entity
Financial liability classification
Accounting Treatment of Compound Financial

Statements in Issuer’s Books
TEST YOUR KNOWLEDGE Issuer must perform the ‘split accounting’ on initial
Contingent settlement event Within the issuer’s recognition as follows:
control?
Issue of an IPO prospectus prior to the Yes In compound financial instrument, identify the various components
conversion date
Successful completion of IPO No Ascertain the fair value of the compound financial
instrument as a whole
A change in accounting, taxation, or No
regulatory regime which is expected to
adversely affect the financial position of the Ascertain the fair value of the liability component
issuer Note: The fair value of the liability component is to be calculated
with reference to fair value of a similar liability (with the same terms
Issuer makes a distribution on ordinary Yes. Dividends on like interest rate, duration etc) that does not have any associated
shares ordinary shares are equity conversion feature
discretionary
Appointment of a receiver, administrator, No. Depends on
entering a scheme of arrangement, or the respective Ascertain the fair value of the equity component as:
compromise agreement with creditors requirements in Fair value of the compound financial instrument as a whole (less)
each jurisdiction the fair value of liability component
Suspension of listing of the issuer's shares No
from trading on the stock exchange for This step ensures
more than a certain number of days no gain or loss on initial
recognition
Change in credit rating of the issuer No

74
FINANCIAL REPORTING
Treasury Shares Offsetting a Financial Asset and a
Financial Liability
Treasury shares are entity’s own reacquired equity
instruments, that are held by the entity A financial asset and a financial liability shall be offset and the
net amount presented in the statement of financial position
when, and only when, an entity:
Holdings of treasury shares may arise in a number of
ways. For example:
Currently has a legally Intends either to settle on
enforceable right to a net basis, or to realise the
In Consolidated financial statement: The entity holds the set off the recognised asset and settle the liability
• Shares held by the employee shares as the result of a amounts simultaneously
benefit trust direct transaction, such as
• Shares were purchased by another • a market purchase, or
entity which subsequently • a buyback of shares This means that the right of set off: If an entity can
became a subsidiary of the from shareholders as a a) Must not be contingent on a settle amounts in a
reporting entity, either through whole, or future event; and manner such that
acquisition or changes in financial • a particular group of b) Must be legally enforceable in the outcome is, in
reporting requirements shareholders. the normal course of business, effect, equivalent
in the event of default and to net settlement,
in the event of insolvency or the entity will meet
bankruptcy of the entity and all the net settlement
of the counterparties criterion
Accounting Treatment of Treasury Shares Offsetting a recognised financial asset and a recognised
financial liability and presenting the net amount is different
Consideration paid or received for acquisition of from the derecognition of a financial asset or a financial liability
Treasury shares shall be adjusted in Equity
Although offsetting does not give rise to recognition of a gain

Are own equity Are own equity or loss, the derecognition not only results in the removal of the
previously recognised financial instrument from the statement
instruments acquired? instruments sold? of financial position but also may result in recognition of a gain
or loss
Debit amount paid Credit amount paid
directly to equity directly to equity A right of set-off is a debtor's legal right, by contract or
otherwise, to settle or otherwise eliminate all or a portion of an
No gains / losses recognised in profit or loss on: amount due to a creditor by applying against that amount an
• Any purchase, sale, issue or cancellation of own amount due from the creditor
equity instruments or
• In respect of any changes in the value of treasury
shares
The conditions set out above are generally not satisfied and
offsetting is usually inappropriate when:
• The amount of treasury shares held is disclosed separately
either in the balance sheet or in the notes, in accordance with
Ind AS 1.
• An entity provides disclosure in accordance with Ind AS 24, when one financial instrument in a 'synthetic instrument'
Related Party Disclosures, if the entity reacquires its own equity is an asset and another is a liability, they are not offset and
instruments from related parties presented in an entity's statement of financial position on a
net basis unless they meet the criteria for offsetting
Interest, Dividends, Losses and Gains

Financial assets and financial liabilities arise from financial
The classification of an issued financial instrument as either a instruments having the same primary risk exposure (for
financial liability or an equity instrument determines recognition example, assets and liabilities within a portfolio of forward
of interest, dividends, gains, and losses relating to that instrument contracts or other derivative instruments) but involve
in profit or loss or directly in equity. different counterparties
• Dividends to holders of outstanding shares that are classified as
equity - Directly to equity. Taxes will be recognised in Equity
Financial or other assets are pledged as collateral for non-
• Dividends to holders of outstanding shares that are classified as
recourse financial liabilities
financial liabilities - Interest expense in Profit and loss. Taxes
will be recognised in Profit or loss
• Changes in the Fair Value of equity instruments of the entity – Financial assets are set aside in trust by a debtor for the
OCI / Profit or Loss. purpose of discharging an obligation without those assets
having been accepted by the creditor in settlement of the
• Changes in the Fair Value of own equity instruments of the obligation (for example, a sinking fund arrangement)
entity – Not recognised.
• Costs incurred in issuing or acquiring own equity instruments
are not expensed but accounted for as a deduction from equity. Obligations incurred as a result of events giving rise to
Such costs include regulatory fees, legal fees, advisory fees, and losses are expected to be recovered from a third party by
other transaction costs virtue of a claim made under an insurance contract
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FINANCIAL REPORTING
This capsule in Final Paper 1 Financial Reporting is sixth in the series. Many of the Ind AS have already been covered in
the capsules on Financial Reporting published in July, 2018, May, 2019 and August, 2019, October, 2019 and November,
2020 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 significant provisions of Ind AS 116 through pictorial/tabular presentations for better
understanding and quick revision. However, Ind AS 116 is a big standard, hence its capsule will be published in two parts.
The capsule covered in this issue of the Journal is Part 1 of Ind AS 116. Remaining part will published in August, 2021
issue of the Journal.
Students are advised to refer the study material or bare text of Ind AS 116 for comprehensive study and revision. Under no
circumstances, this capsule substitute the detailed study of the material provided by the Board of Studies.
Indian Accounting Standards (Ind AS) 116 : Leases - Part I
Objective
This information gives

a basis for users of
This Standard sets out the principles for financial statements
to assess the effect of
the lease on
recognition measurement presentation disclosure
financial financial cash

position performance flows
of lease
of an entity
Scope
Ind AS 116 shall be applied to ALL LEASES, including leases of Right-of-Use (ROU) assets in a sub-lease, EXCEPT for:
Sr. No. Particulars Reason
1 Leases to explore for or use minerals, oil, natural gas and Within the scope of Ind AS 106 ‘Exploration for and Evaluation
similar non-regenerative resources of Mineral Resources’
2 Leases of biological assets held by a lessee Within the scope of Ind AS 41 ‘Agriculture’
3 Service concession arrangements Within the scope of Appendix D of Ind AS 115 ‘Revenue from
Contracts with Customers’
4 Licences of intellectual property granted by a lessor Within the scope of Ind AS 115 ‘Revenue from Contracts with
Customers’
5# Rights held by a lessee under licensing agreements for such Within the scope of Ind AS 38 ‘Intangible Assets’
items as motion picture films, video recordings, plays,
manuscripts, patents and copyrights
#A lessee may, but is not required to, apply Ind AS 116 to leases of intangible assets other than those described herein.
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FINANCIAL REPORTING
Recognition Exemptions
Short-term leases Leases for which the underlying asset is of low-value
ONLY IF BOTH the conditions are satisfied

A short-term lease A short-term
is a lease that, at the lease does
commencement not include
date, has a lease an option to The lessee can The underlying
term of 12 months purchase the benefit from use asset is not highly
or less underlying asset of the underlying dependent
asset on its own or on, or highly
together with other interrelated
resources that are with, other
readily available to assets
This exemption can be made by
the lessee
class of underlying asset (assets of
a similar nature and use) to which
the right of use relates.
The exemption can be made on a

Note: A lease cannot be classified as short-term if the lease lease-by-lease basis
term is subsequently reduced to less than 12 months
Note:
1. The exemption for leases of low-value items intend to capture leases that are high in volume but low in value
2. If a lessee subleases an asset, or expects to sublease an asset, the head lease does not qualify as a lease of a low-value
asset, i.e., an intermediate lessor who subleases, or expects to sublease an asset, cannot account for the head lease
as a lease of a low-value asset
Important points regarding the leases of low-value assets

Leases of low-value assets are
Value of an underlying asset to be assessed based on
exempted regardless of whether
the value of the asset when it is new, regardless of the
those leases are material to the lessee
age of the asset being leased *
Examples of low-value underlying assets can include: The assessment performed on an

- tablet absolute basis. It is not affected by
- personal computers, the size, nature or circumstances of
- small items of office furniture the lessee
- telephones
* A lease of an underlying asset does not qualify as a lease of low value asset if the nature of the asset is such that, when new, the asset is typically
not of low value. For e.g., leases of cars would not qualify as leases of low-value assets because a new car would typically not be of low value.
Accounting on election of recognition exemption
The lease payments shall be recognised as an expense
either or
Straight-line basis over Another systematic basis if that basis is more representative
the lease term of the pattern of the lessee’s benefit.

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FINANCIAL REPORTING
Lease as per Ind AS 116
Definition A lease is defined as a contract, or part of a contract that conveys the right to control the use of
an identified asset for a period of time in exchange for consideration.
Date to identify the contract as a lease Ind AS 116 requires customers and suppliers to determine whether a contract is or contains a lease
at the inception of the contract.
Inception date The inception date is defined as the earlier of the following dates:
• date of a lease agreement
• date of commitment by the parties to the principal terms and conditions of the lease
Whether an Arrangement contains Lease?
No
Is there an identified asset?
Yes
Does the customer have right to

obtain substantially all of the No
economic benefits from the use of asset
throughout the period of use?
Yes
Does the customer or the supplier has

Customer the right to direct how and for what Supplier
purpose the asset is used throughout
the period of use?
If pre-determined then, whether the

customer No
Operates the asset ?
OR
Designed the asset ?
Yes
Contract Contract does not

contains a lease contain a lease
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FINANCIAL REPORTING
The above chart can be elaborated as follows:
Leases
Identified asset Customer has right to control the use of

the asset throughout the period of use
Explicitly / Supplier has NO Right to obtain substantially Right to

implicitly substantive rights all economic benefits shall direct the
specified to substitute the accrue to customer from use
asset use of an asset
These are decision

The supplier has The supplier would Directly or making rights for
no PRACTICAL not BENEFIT indirectly by assessing which
A B I L I T Y ECONOMICALLY* using, holding or party directs
to substitute from the exercise of sub-leasing the the use of the
alternative assets its right to substitute asset identified asset
throughout the the asset
period of use
It includes
primary output
and by -products
There should be (including
a commercial potential cash
*The economic transaction with flows derived
benefits associated a third party from these items)
with substituting the
asset are expected
to exceed the costs
associated with
substituting the asset Either Or
How What Where When Operating Designing

Or
rights rights
These rights should vest with customer / lessee
Note:
1. In the case of substitution rights, the analysis primarily considers factors from the supplier’s perspective.
2. If the supplier has a right or an obligation to substitute the asset only on or after either a particular date, or the occurrence of
a specified event, the supplier’s substitution right is not substantive because the supplier does not have the practical ability to
substitute alternative assets throughout the period of use.
3. An entity’s evaluation of whether a supplier’s substitution right is substantive is based on facts and circumstances at inception of the
contract. At inception of the contract, an entity should not consider future events that are not likely to occur.
4. Contract terms that allow or require a supplier to substitute alternative assets only when the underlying asset is not operating properly
(for e.g., a normal warranty provision) or when a technical upgrade becomes available do not create a substantive substitution right.
5. Circumstances, at inception of the contract, if are not likely to occur, are excluded from the evaluation of whether a supplier’s
substitution right is substantive throughout the period of use:
6. The right to control the use of an asset may not necessarily be documented, in form, as a lease agreement.
7. A customer should presume that a supplier’s substitution right is not substantive when the customer cannot readily determine
whether the supplier has a substantive substitution right. This requirement is intended to clarify that a customer is not expected to
exert undue effort to provide evidence that a substitution right is not substantive.
8. An identified asset must be physically distinct. A physically distinct asset may be an entire asset or a portion of an asset. Similarly, a
capacity or other portion of an asset that is not physically distinct is not an identified asset unless it represents substantially all of the
capacity of the asset and thereby provides the customer with the right to obtain substantially all of the economic benefits from use
of the asset.

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FINANCIAL REPORTING
Examples of circumstances that, at inception of the contract, are not likely to occur and, thus, are excluded from the evaluation of whether a
supplier’s substitution right is substantive throughout the period of use:
(1) (2)
An agreement by a future customer to pay an above The introduction of new technology that is not
market rate for use of the asset substantially developed at inception of the contract
(3) (4)
A substantial difference between the customer’s use A substantial difference between the market price
of the asset, or the performance of the asset, and the of the asset during the period of use, and the market
use or performance considered likely at inception of price considered likely at inception of the contract
the contract
Right to Direct the Use
Identify the rights that are most relevant to

changing how and for what purpose the asset
is used (i.e., those that affect the economic
beneﬁts to be derived from the asset)
No Are the decisions made related to the rights

Does the customer
hold the rights? identiﬁed above predetermined?
Yes
Yes
Does the customer have the right to operate (or
direct others to operate) the asset throughout
The customer has the Yes the period of use without supplier having right
right to direct the use to change those operating instructions?
of the asset
No
Did the customer design the asset in a way that
Yes determined how and for what purpose the asset
will be used throughout the period of use?
No
No
The supplier has the right to direct the use of
the asset
Examples of relevant decision-making rights that grant the right to change how and for what purpose the
asset is used
1 Lease of trucks / aircraft / rail cars etc • Which goods are transported?
• When the goods are transported and to where?
• How often the asset is used?
• Which route is taken?
2 Retail unit • Which goods will be sold?
• Prices at which the goods will be sold?
• Where and how the goods are displayed?
3 Power plant • How much power will be delivered and when?
• When to turn the power plant on/off?
4 Fibre-optic cable • When and whether to light the fibres?
• What and how much data the cable will transport?
• How to run the cable?
• Through which routes the data will be delivered?
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FINANCIAL REPORTING
Specifying the output of an asset before the period of use
• If a customer can only specify the output from an asset before the beginning of the period of use and cannot change that output
throughout the period of use, the customer does not have the right to direct the use of that asset unless it designed the asset, OR
specific aspects of the asset.
• If the customer did not design the asset or aspects of it, the customer’s ability to specify the output in a contract that does not give it any
other relevant decision-making rights relating to the use of the asset (for e.g., the ability to change when, whether and what output is
produced) gives the customer the same rights as any customer that purchases goods or services in an arrangement (i.e., a contract that
does not contain a lease).
Protective rights
• A supplier’s protective rights, in isolation, do not prevent the customer from having the right to direct the use of an identified asset.
• Protective rights typically define the scope of the customer’s right to use the asset without removing the customer’s right to direct the
use of the asset. Protective rights are intended to protect a supplier’s interests.
• Protective rights typically define the scope of the customer’s right of use but do not, in isolation, prevent the customer from having the
right to direct the use of an asset.
Separation of Lease and Non-Lease Components

Identifying and separating lease components of a contract
The right to use each asset is considered as a ‘separate’ lease component
ONLY IF BOTH the following conditions are satisfied
The lessee can benefit from the use of the asset The underlying asset is neither highly dependent
either on its own OR together with other resources on, nor highly interrelated with, the other
that are readily available to the lessee underlying assets in the contract
Note: If one or both criteria are not met then, the right to use multiple assets is considered as a ‘single’
lease component, i.e., not a ‘separate’ lease component
1. Separating lease Only items that contribute to securing the output of the asset are lease components.
components from non- Costs incurred by a supplier to provide maintenance on an underlying asset, as well as the materials
lease components and supplies consumed as a result of the use of the asset, are not lease components.
The non-lease components are identified and accounted for separately from the lease component in
accordance with other standards. For e.g., the non-lease components may be accounted for as executory
arrangements by lessees (customers) or as contracts subject to Ind AS 115 by lessors (suppliers).
Costs related to property taxes and insurance that do not involve the transfer of a good or service,
are fixed in the contract. Hence, they should be included in the overall contract consideration to be
allocated to the lease and non-lease components.
2. Lessee reimbursements Reimbursements (or certain payments on behalf of lessor) by lessee that do not transfer a good or
– whether a separate service to the lessee are not separate components of the contract.
component of a contract? Such items are considered as part of the total consideration which is allocated to the separately
identified components of the contract (i.e., the lease and non-lease components, if any).
3. Optional exemption of Ind AS 116 provides a practical expedient that permits lessees to make an accounting policy election,
using Practical Expedient- by CLASS OF UNDERLYING ASSET, to account for each separate lease component of a contract and
not to separate non-lease any associated non-lease components as a SINGLE LEASE COMPONENT.
component This practical expedient is not permissible for lessor.
Lessees that make the policy election to account for each separate lease component of a contract
and any associated non-lease components as a SINGLE LEASE COMPONENT, allocate ALL of the
contract consideration to the lease component.
Practical expedient does not allow lessees to account for multiple lease components of a contract as a
single lease component, if it meets the conditions given in point 1 above.
4. Determining and allocating Lessees that do not use the practical expedient, are required to allocate the consideration in the
the consideration in the contract to the lease and non-lease components on a RELATIVE STAND-ALONE PRICE BASIS.
contract – Lessee If observable stand-alone prices are not readily available, lessees estimate stand-alone prices,
maximising the use of observable information.
5. Determining and allocating Lessor are required to allocate the consideration in the contract to the lease and any associated non-
the consideration in the lease components as per paragraphs 73 – 90 of Ind AS 115 Revenue from Contracts with Customers.
contract – Lessors

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FINANCIAL REPORTING
Contract Combinations
Ind AS 116 requires that two or more contracts entered into at or near the same time with the same counterparty (or related parties of the
counterparty) be considered a ‘single’ contract IF ANY ONE of the following criteria is met:
The contracts are The amount of The rights to use the

negotiated as a consideration to be underlying assets
package with an paid in one contract conveyed in the contracts
overall commercial depends on the price (or some of the rights to
Or Or
objective that cannot or performance of the use underlying assets
be understood other contract conveyed in each of the
without considering contracts) are a single
the contracts together lease component
Portfolio Application
• Ind AS 116 includes a practical expedient that allows entities to use a portfolio approach for leases with similar characteristics if the
entity reasonably expects that the effects on the financial statements would not differ materially from the application of the standard
to the individual leases in that portfolio.
• If accounting for a portfolio, an entity uses estimates and assumptions that reflect the size and composition of the portfolio.
• A decision to use the portfolio approach would be similar to a decision some entities make today to expense, rather capitalise,
certain assets when the accounting difference is, and would continue to be, immaterial to the financial statements.
Determination of contract that whether it contains a lease is done at the inception of the contract.
Date of a lease agreement

Whichever date is earlier
Inception date of a lease
Date of commitment by the parties to the principal

terms and conditions of the lease
Commencement date of a lease

On this date
The commencement date is the date on which a lessor
makes an underlying asset* available for use by a lessee
a lessee initially recognises a lessor (for finance leases)

• a lease liability and initially recognizes
*The ‘underlying asset’ is • related Right of Use Asset (ROU Asset)* • its net investment in the lease
an asset that is the subject
of a lease, for which the
right to use that asset has
been provided by a lessor
to a lessee *‘ROU Asset’ represents a lessee’s right to use
an underlying asset for the lease term
Note:
• In certain cases, the commencement date of the lease may be before the date stipulated in the lease agreement.
• The timing of when lease payments begin under the contract does not affect the commencement date of the lease.
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FINANCIAL REPORTING
Lease Term
The assessment of the lease term is a critical estimate and a key input to the amount of the lease liability.
Particulars Years
1 Rent free period XXX
2 Non-cancellable period XXX
3 Optional renewable periods (where lessee is reasonably certain to extend the lease) XXX
4 Periods covered by option to terminate the lease (where lessee is reasonably certain
not to terminate early) XXX
Total Lease terms XXXX
Notes:
• Lease term begins at the commencement date and include any rent-free period.
• Termination options held by the lessor are not considered when determining the lease term.
• The assessment of whether it is reasonably certain that a lessee will exercise an extension or termination option should be done on
lease commencement date.
An entity should consider all relevant facts and circumstances that create an economic incentive for the lessee to exercise, or not to exercise,
the option, including any expected changes in facts and circumstances from the commencement date until the exercise date of the option.
Example of relevant factors to consider are:
Contractual terms vis-a vis market rates Asset related factors
1. Lease rentals in optional period, ex. Termination penalties and residual value 1. Specialised asset
guarantees
2. Variable or contingent payment 2. Location of underlying asset
3. Terms and condition after initial optional period. Example: Purchase option 3. Availability of suitable alternatives
4. Cost relating to the termination of the lease and signing of new replacement lease 4. Existence of significant leasehold
improvement
Cancellable In assessing the length of the non-cancellable An arrangement is not

leases period of a lease, determine the period for which enforceable if
the contract is enforceable
both the lessor and with no

Any non-cancellable lessee each have the right more than an
periods are considered to terminate the lease i n s i g n i f i c a nt
part of the lease term without permission penalty
from the other party
If only the lessor If only the lessee has If both the lessee and the lessor can
has the right to the right to terminate terminate the contract without more
terminate a lease a lease than an insignificant penalty
the period covered by the right is a there are no enforceable rights

the option to terminate termination option and obligations beyond the non-
the lease is included which is included in cancellable term
in the non-cancellable determining the lease Hence, the lease term is limited to
period of the lease term the non-cancellable term

83
FINANCIAL REPORTING
Explained through an example:
Suppose the term of a contract is 10 years and the non-cancellable / lock-in period is 6 years. The lease term shall be as follows:
If the termination option If the termination option is with ‘Lessee’ If the termination option is
is with ‘Lessor’ with ‘Both’ (i.e., any party can
terminate)
The lease term shall be The lease term shall be 10 years assuming The lease term shall be
10 years. reasonable certainty. 6 years.
Because even after 6th year, the lessee Because after the expiry of 6th year, though the lessee is not Because after 6th year, either party
would be contractually bound until contractually bound till 10th year, i.e., the lessee can refuse to can terminate the contract without
10th year i.e. lessee cannot refuse to make payment anytime without lessor’s permission but, it is the consent of the other party
make the payment till the expiry of assumed that the lessee is reasonably certain that it will not and hence, the contract is not
the contract and also, has the right exercise this option to terminate. Hence, though there is no enforceable after 6th year ONLY IF
to use the asset until 10th year, unless enforceable obligation from lessee’s point of view beyond 6th year there is insignificant penalty for
lessor terminates the contract. but, basis the said assumption, the lease term shall be 10 years. termination.

Reassessment of lease term and purchase options

A. For lessees
Lessees are required to reassess the lease term upon the occurrence of either a significant event OR a significant change in the
circumstances that:
Is within the Affects whether the lessee is reasonably certain to exercise / not
control of the to exercise renewal, termination and / or purchase option, not
lessee previously included in its determination of the lease term
Following are some of the examples of significant events or significant changes in circumstances within the lessee’s control:
1) Constructing significant leasehold improvements that are expected to have significant economic value
for the lessee when the option becomes exercisable
2) Making significant modifications or customisations to the underlying asset
3) Making a business decision that is directly relevant to the lessee’s ability to exercise, or not to exercise,
an option (e.g., extending the lease of a complementary asset or disposing of an alternative asset)
4) Subleasing the underlying asset for a period beyond the exercise date of the option
Note: Changes in market-based factors (for e.g., a change in market rates to lease or purchase a comparable asset) are not within the lessee’s
control, and therefore, they do not trigger a reassessment by themselves.
Revision of Lease Term

Lessees are required to revise the lease term if there is change in the non-cancellable period of lease. Following are the example which leads
to change in non-cancellable period of a lease:
If the lessee exercises an option not previously If the lessee does not exercise an option
included in the entity’s determination of the previously included in the entity’s
lease term determination of the lease term
Change in non-cancellable
lease period
An event occurs that contractually obliges An event occurs that contractually prohibits
the lessee to exercise an option not previously the lessee from exercising an option previously
included in the entity’s determination of the included in the entity’s determination of the
lease term lease term
B. For lessors
Lessor revises the lease term to account for the lessee’s exercise of an option to extend or terminate the lease or purchase the underlying
asset when exercise of such options was not already included in the lease term.
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FINANCIAL REPORTING
Lease Payments
Lease payment for the Lessors
Lease payment for the Lessees
Fixed payments Variable lease Exercise price Payments of Expected Residual value
(including in- payments that of a purchase penalties for residual guarantees
substance fixed depend on an option if terminating the v a l u e provided by the
payments), index or a rate the lessee is lease, if the lease guarantees lessee or a third
less any lease measured using the reasonably term reflects the payable by party related
incentives* prevailing rate at certain to lessee exercising the lessee to the lessee or
the measurement exercise that an option to unrelated to the
date** option terminate the lease lessor
It includes any in-substance fixed lease payments which are the payments that may, in
form, contain variability but in substance, are unavoidable
*Lease incentives
• For lessee - lease incentives that are paid or payable to lessee by the lessor are deductible from lease payments and reduce
the initial measurement of lessee’ ROU asset.
• For lessors - lease incentives are also deducted from lease payments and affect the lease classification test.
 For finance leases
 lease incentives reduce the expected lease receivables at the commencement date and thereby the initial
measurement of the lessor’s net investment in the lease.
 selling profit or loss is not affected.
 For operating leases
 defer the cost of any lease incentives paid or payable to the lessee and recognise that cost as a reduction to lease
income over the lease term.
**Lessees subsequently remeasure the lease liability if there is a change in the cash flows (i.e., when the adjustment to the lease
payments takes effect) for future payments resulting from a change in index or rate used to determine lease payments.
Exclusion of payments for calculating lease liability:

a. Lease payments allocated to non-lease components of a contract, unless the lessee elects to combine non-lease
components with a lease component and to account for them as a single lease component.
b. Variable lease payments that do not depend on index or rate. They are recognised in profit or loss in the period in which the
event that triggers the payment occurs.
Lessee Involvement before Commencement Date
The lessee may obtain legal title to an underlying asset before that legal title is
transferred to the lessor and the asset is leased to the lessee
Yes Whether the lessee obtains control No

of the underlying asset before that
asset is transferred to the lessor?
The transaction is a ‘sale The transaction is

and leaseback transaction’ accounted as a lease

85
FINANCIAL REPORTING
‘Initial direct costs’ are the incremental costs of obtaining a lease

that would not have been incurred if the lease had not been obtained,
Definition except for such costs incurred by a manufacturer or dealer lessor
in connection with a finance lease
Accounting by
It is included in his initial measurement of the right-of-use asset
lessee
Initial Direct Costs
• Initial direct costs, other than those incurred by manufacturer

or dealer lessors, are included in the initial measurement of the
net investment in the lease and reduce the amount of income
Accounting by
recognised over the lease term
lessor
• The interest rate implicit in the lease is defined in such a way
that the initial direct costs are included automatically in the net
investment in the lease and there is no need to add them separately
Note Lessees and lessors apply the same definition of initial direct costs
Examples Costs included and excluded from initial direct costs
Inclusion Exclusion
Commission (including payments to employees acting Employee salaries
as selling agents)
Legal fees resulting from the execution of the lease Legal fees for services rendered
before the execution of the lease
Lease document preparation costs incurred after the Negotiating lease term and
execution of the lease conditions
Certain payments to existing tenants to move out Advertising
Consideration paid for a guarantee of a residual asset Depreciation and amortization
by an unrelated third party
Discount Rates
Discount rates are used to determine the present value of the lease payments, which are used to determine Right-of Use asset and Lease
liability in case of a lessee and to measure a lessor’s net investment in the lease.
For a Lessee
Discount rate to be used should be:
THE INTEREST RATE IMPLICIT If not, then the lessee shall use
IN THE LEASE, if that rate can be OR THE LESSEE’S INCREMENTAL
readily determined BORROWING RATE
Where,
‘Interest rate implicit in the lease’ is defined as the rate of interest that causes the following:
The present value The The fair Any initial

of lease payments unguaranteed value of the direct costs
made by the lessee for residual value underlying of the lessor
the right to use the asset
underlying asset
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FINANCIAL REPORTING
• Lessee’s incremental borrowing rate is the rate of interest that

- the lessee would have to pay to borrow over a similar term
- and with a similar security
- the funds necessary to obtain an asset of a similar value to the Right of use Asset
- in a similar economic environment.
• In determining the incremental borrowing rate, the lessee considers borrowings with a similar term and security to the ROU Asset
(NOT the underlying asset).
• If the contract requires lease payments to be made in a foreign currency then, the incremental borrowing rate of the lessee should be
determined based on a borrowing of a similar amount in that foreign currency.
For a Lessor:
Lessor to use the interest rate implicit in the lease.
Fair Value
The fair value for the purposes of applying the lessor accounting requirements in Ind AS 116 is the amount for which an asset could be
exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
Note: For the purposes of determination of fair value under Ind AS 116, above stated definition is to be considered, hence Ind AS 113 “Fair
Value Measurement” is not applicable for determination of fair value.
Accounting in the Books of Lessee

• A ‘lessee’ is defined as an entity that obtains the right to use an underlying asset for a period of time in exchange for consideration.
• At the commencement date, a lessee shall recognise a ROU Asset and a Lease Liability.
• A lessee initially measures the ROU Asset at COST, which consists of ALL of the following:
Initial Measurement of Right-of Use Asset (ROU Asset)

Present Value of Lease Liability (Refer Chart on 'Lessee Payments')
Initial direct costs
Estimated cost to dismantle, remove or restore,

measured as per Ind AS 37
Prepaid lease payments (example- deposits)
Lease incentives received
Right-of use asset
Journal entry in the books of lessee

ROU Asset Dr. Sum total of all below items
To Lease liability Cr. Present Value of outstanding lease payments by lessee using interest rate implicit in lease
To Lessor / Supplier Cr. Any lease payment made on or before the commencement date less lease incentives received
To Bank / Creditor Cr. Initial direct costs incurred by lessee
To Provision for Cr. Estimate of costs to be recognised only when lessee incurs an obligation for these costs
dismantling / removing (Ind AS 37)
the underlying asset

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FINANCIAL REPORTING
Subsequent Measurement
Right-of-use assets (ROU Asset) Lease liability
a. Increase the carrying amount

Measured either using a cost model or
to reflect interest on the lease
revaluation model as per Ind AS 16
liability;
b. Reduce the carrying amount
to reflect the lease payments
Cost Model: Measure a right- Revaluation made; and
of-use asset initially at cost model c. Remeasure the carrying
amount to reflect any
reassessment or lease
modifications or to reflect
If ROU assets
revised in-substance fixed
Less accumulated Adjusted for re- relate to
lease payments.
depreciation measurements
and accumulated of the lease
impairment losses liability A class of Investment
property, property
plant and under Ind
equipment AS 40
Whether the ownership of the (PPE) (Ind
underlying asset transfers to AS 16)
the lessee at the end of the lease
Y term, or it is reasonably certain N
that the lessee will exercise a A p p l y Re valuation
purchase option? revaluation model cannot
model to all be applied
of the ROU because Ind
assets of AS 40 does
Depreciate from Depreciate from that class of not permit
the commencement the commencement PPE
date based on the date based on
useful life of the earlier of
underlying asset
End of the End of the

useful life of the lease term
ROU Asset
Recognition of a lease
On the balance sheet In the Statement of Profit and Loss In Statement of Cash flows
Asset Liability Lease expense Principle portion Interest portion

ROU Asset of Obligation to • Depreciation of the ROU Asset of the lease of the lease
underlying asset make lease liability liability
• Interest expense on the Lease Liability
payment • Variable lease payments that are not These cash These cash
included in the lease liability payments are payments are
presented within presented within
• Impairment of the ROU Asset
financing activities financing activities
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FINANCIAL REPORTING
Leases denominated in a foreign currency
Lease Liability Applying Ind AS 21, Lessees remeasure the foreign currency-denominated lease liability
using the exchange rate at each reporting date, like they do for other monetary liabilities.
Any changes to the lease liability due to exchange rate changes are recognised in profit or
loss.
ROU Asset Since ROU Asset is a non-monetary asset measured at historical cost, it is not affected by
changes in the exchange rate.
Remeasurement
Remeasure lease liabilities upon a change in lease payments on account of ANY of the following:
The reassessment of lease term on The reassessment of whether the

account of reasonable certainty to lessee is reasonably certain to In-substance fixed
exercise/not exercise of extension exercise an option to purchase the lease payments
and/or termination option underlying asset
The amounts expected to be

Future lease payments resulting
payable under residual value
from a change in an index or rate
guarantees
When to use the ‘original’ and a ‘revised’ discount rate?

Revised Discount Rate Original Discount Rate
Lessees use a revised discount rate when lease payments are Lessees use the original discount rate when lease payments are
updated for updated for
- reassessment of the lease term OR - a change in expected amounts for residual value guarantees
- a reassessment of a purchase option. AND
The revised discount rate is based on the interest rate implicit in the - payments dependent on an index or rate, unless the rate is a
lease for the REMAINDER of the lease term. If that rate cannot be floating interest rate.
readily determined, the lessee uses its incremental borrowing rate. - the variability of payments is resolved so that they become in-
substance fixed payments.
Note: A lessee recognises the amount of the remeasurement of the lease liability as an adjustment to the ROU Asset. However, if the carrying
amount of the ROU Asset is reduced to zero and there is a further reduction in the measurement of the lease liability, a lessee recognises any
remaining amount of the remeasurement in profit or loss.

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FINANCIAL REPORTING
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 covers almost all Indian Accounting Standards. Earlier in July, 2018, May, 2019, August, 2019,
October, 2019 and November, 2020 issues, we have covered the concepts on many other Ind AS. 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.
This is part 2 of the sixth capsule in the series of Final Paper 1 : Financial Reporting. Part 1 of the sixth capsule was
published in July, 2021 issue of this Journal. In continuation to Part I, this capsule contains remaining concepts of Ind
AS 116 : Leases.
Students are advised to refer the study material or bare text of Ind AS 116 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 Standards (Ind AS) 116 : Leases - Part II
Lease Modifications in the Books of Lessee

A ‘lease modification’ is a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions
of the lease.
Examples of lease modifications that may be negotiated after the lease commencement date:
Early termination A change in the timing

A lease extension
of the lease of lease payments
Leasing additional space Surrendering a part of

in the same building the underlying asset
Lessee’s Analysis of a Change in Lease
Is an additional right of use granted? No
Yes
Yes Is the price of the additional right No

of use commensurate with its
standalone price ?
Reassess lease classification

Account for the additional right
and remeasure the lease liability
of use as a new separate lease
and adjust right-of-use asset
(i.e., two leases)
(i.e., one lease)
The exercise of an existing purchase or renewal option or a change in the assessment of whether such options are reasonably certain to be
exercised are not lease modifications but can result in the remeasurement of Lease Liabilities and ROU Assets.

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FINANCIAL REPORTING
Accounting Treatment for Lease Modifications that are not Accounted for as Separate
Leases
• Remeasure lease liability using revised discount rate * (1)
Decrease • Decrease right-of-use asset by its relative scope compared
in scope to the original lease (2)
• Difference between (1) and (2) recognised in P&L
All other
• Remeasure lease liability using revised discount rate*
lease
• Remeasure right-of-use asset by same amount
modification
* The implicit rate in the lease is to be used. If it cannot be readily determined, the incremental rate of borrowing is to be used.
• The re-measurements occur as of the effective date of the lease modification on a prospective basis.
• In some cases, the lessee and lessor may agree to a modification to the lease contract that starts at a later date (i.e., the terms of the
modification take effect at a date later than the date when both parties agreed to the modification). This can be understood with the help of
a following example:
Case study: A lessee enters into a lease arrangement with a lessor to lease an asset for 10 years. At the beginning of year 8, the lessee and
lessor agree to a modification to the contract that will take effect from the beginning of year 9.
Scenario 1 Scenario 2 Scenario 3

(Increase in scope – (Increase in scope – Separate Lease) (Decrease in scope)
Not a Separate Lease)
Lessee will re-allocate the Lessee will allocate the consideration in the modified Lessee will re-allocate the
consideration in the modified contract to each of the existing and new lease and non-consideration in the modified contract
contract to each of the existing lease components at the date both parties agreed to theto each existing lease and non-lease
lease and non-lease components modification (the beginning of year 8). component and remeasure the
and The lessee will remeasure the lease liability for the lease liability and ROU Asset at the
Remeasure the lease liability at the existing lease components at that date as well. However, effective date of the modification (the
date both parties agreed to the recognition of the lease liability and ROU Asset for any beginning of year 8).
modification (the beginning of new lease component occurs at the commencement date
year 8). of the new lease component (the beginning of year 9).
Summarised Flowchart for Lease Modification in the Books of Lessee:
Lease Modification
Change in consideration Change in lease term Change in scope
Increase Decrease Decrease Increase
Consideration not Consideration

- Remeasure the lease - Derecognise the lease commensurate to stand- commensurate to stand-
liability at modification liability and ROU Asset to alone selling price alone selling price
date reflect the partial or full
- Make corresponding termination of the lease
adjustment to ROU - Recognise in P&L the gain
Asset or loss on termination of the - Remeasure the Increase in scope of
lease lease liability at the lease of underlying
modification date asset to be accounted
- Make corresponding as a new lease
adjustment to ROU
Asset
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FINANCIAL REPORTING
Presentation in the Books of Lessee
Balance Sheet Statement of profit and loss Statement of cash flows
ROU Assets: Depreciation and Interest: Principal portion of the lease liability:
They are presented either: Depreciation on Right of use asset - These cash payments are presented within
and interest expense accreted on lease financing activities
- Separately from other assets (e.g., owned liabilities are presented separately
assets) OR (i.e., they CANNOT be combined). Interest portion of the lease liability:
- Together with other assets as if they were - These cash payments are presented within
owned, with disclosures of the balance This is because interest expense on financing activities
sheet line items that include ROU Assets the lease liability is a component of
and their amounts finance costs Short-term leases and leases of low-value assets:
- Lease payments pertaining to them (i.e., not
ROU Assets that meet the definition of recognised on the balance sheet as per Ind AS
investment property are presented as 116) are presented within operating activities
investment property
Variable lease payments not included in the
Lease Liabilities: lease liability:
They are presented either: - These are also presented within operating
- Separately from other liabilities activities
OR
Non-cash activity:
- Together with other liabilities with
Such activity is disclosed as a supplemental non-
disclosure of the balance sheet line items
cash item (e.g., the initial recognition of the lease
that includes lease liabilities and their
at commencement)
amounts
Disclosures in the Books of Lessee

Ind AS 116 requires lessees to present all disclosures in:
- a single note OR
- separate section in the financial statements.
Quantitative Disclosure Requirement

Balance Sheet Statement of profit and loss Statement of cash flows
– Additions to right-of-use assets – Depreciation for assets by class – Total cash outflow for leases
– Carrying value of right-of-use assets – Interest expense on lease liabilities
at the end of the reporting period by – Short-term leases expensed*
class – Low-value leases expensed*
– Maturity analysis of lease liabilities – Variable lease payments expensed
separately from other liabilities based – Income from subleasing
on Ind AS 107 requirements – Gains or losses arising from sale and leaseback transactions
* These disclosures need not include leases with lease terms of one month or less.
• All of the above disclosures are required to be presented in tabular format, unless another format is more appropriate.
• The amounts disclosed include costs that a lessee has included in the carrying amount of another asset during the reporting period.
• Other disclosure requirements also include:
 Commitments for short-term leases if the current period expense is dissimilar to future commitments.
 For right-of-use assets that meet the definition of investment property, the disclosure requirements of Ind AS 40, Investment Property,
with a few exclusions.
 For right-of-use assets where the revaluation model has been applied, the disclosure requirements of Ind AS 16, Property, Plant and
Equipment.
 Entities applying the short-term and / or low-value lease exemptions are required to disclose that fact.
Qualitative Disclosure Requirements

– A summary of the nature of the entity’s leasing activities;
– Potential cash outflows the entity is exposed to that are not included in the measured lease liability:
• Variable lease payments;
• Extension options and termination options;
• Residual value guarantees;
• Leases not yet commenced to which the lessee is committed;
• Restrictions or covenants imposed by leases;
• Sale and leaseback transaction information.

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FINANCIAL REPORTING
In providing additional information, lessees are required to consider:
(a) Whether that information is relevant to the users of the financial statements. The additional information is included ONLY IF that
information is expected to be relevant to users of financial statements. For e.g., this is likely to be relevant if it helps those users to
understand:
The flexibility provided by leases for e.g., a lessee can reduce its exposure by exercising termination options or renewing
leases with favourable terms and conditions
Restrictions imposed by leases for e.g., by requiring the lessee to maintain particular financial ratios
Sensitivity of reported information to key for e.g., future variable lease payments
variables
Deviations from industry practice for e.g., unusual or unique lease terms and conditions that affect a lessee’s lease portfolio
Exposure to other risks arising from leases
(b) Whether that information is apparent from information either presented in the primary financial statements or disclosed in the notes.
Note: A lessee need not duplicate information that is already presented elsewhere in the financial statements.
Accounting in the Books of Lessor

a lease that does not transfer substantially
Operating Lease all the risks and rewards incidental to
ownership of an underlying asset
Classification of Lease
at Inception
a lease that transfers substantially all the
Finance Lease risks and rewards incidental to ownership
of an underlying asset
Examples that Individually, or in Combination, would normally Lead to a Lease being

Classified as a FINANCE LEASE
The lease transfers ownership of the asset to the lessee by the end of the lease term
Ownership
The lessee has the option to purchase the asset at a price that is expected to be sufficiently
lower than the fair value at the date the option becomes exercisable for it to be reasonably
Purchase certain, at the inception date, that the option will be exercised
option
The lease term is for the major part of the economic life of the asset even if title is not
Lease transferred
term
PV of At the inception date, the present value of the lease payments amounts to at least
Minimum substantially all* of the fair value of the asset
Lease
Payments
The asset is of such a specialised nature that only the lessee can use it without major
Specialised modifications
Nature
*The term “substantially all”

is not defined in Ind AS 116.
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FINANCIAL REPORTING
Additionally, Ind AS 116 lists the following indicators of situations that, individually or in combination, could also lead to a lease being
classified as a FINANCE LEASE
If the lessee can cancel the lease, the lessor’s losses associated with the
Loss on cancellation cancellation are borne by the lessee
Risk of fair value of Gains or losses from the fluctuation in the fair value of the residual accrue
the residual asset to the lessee (e.g., in the form of a rent rebate that is equal to most of the
sale proceeds at the end of the lease)
The lessee has the ability to continue the lease for a secondary period at a
Option to extend lease rent that is substantially lower than market rent
Lease Classification Test for Land and Buildings by the Lessor

Classification assessment • Lessor separately assesses the classification of each element as a finance lease or an operating lease,
having fact that land normally has an indefinite economic life
• If the lease payments cannot be allocated reliably between the land and the buildings elements, the
entire lease is classified as a finance lease
• If both elements (land and building) of the lease payments are operating leases, the entire lease is
classified as an operating lease
Allocation of lease • Allocate lease payments between the land and the buildings elements in proportion to the relative fair
payments values of the leasehold interests in the land element and buildings element of the lease at the inception
date
Single unit - Economic life • When the amount for the land element is immaterial to the lease, the lessor may treat the land and
buildings as a single unit for the purpose of lease classification and classify it as a finance lease or an
operating lease.
• In such a case, the lessor regards the economic life of the buildings as the economic life of the entire
underlying asset
Reassessment of Lease Classification by the Lessor
Lessors reassess the lease At the effective date of the

classification modification using the modified
conditions at that date
ONLY IF there is a lease

modification
A change in A change in the A change in

the scope of a consideration for conditions of
lease a lease, that was the lease
not part of the
original terms
Note: If a lease modification results in a separate new lease, that new lease would be classified in the same manner as any
new lease.

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FINANCIAL REPORTING
The lease payments (refer chart on Lease Any unguaranteed
Gross investment
Payments given in Part I of Ind AS 116 capsule) residual value accruing
in the lease
receivable by a lessor under a finance lease to the lessor
Portion of the residual value of the

underlying asset, the realisation of which
by a lessor is not assured or is guaranteed
solely by a party related to the lessor
Net investment Gross investment Discounted at the interest

in the lease in the lease rate implicit in the lease
Accounting for Initial Direct Costs

By Lessor
Finance Lease:
• Lessors (other than manufacturer or dealer lessors) are required to include initial direct costs in the initial measurement of their net
investment in finance leases and reduce the amount of income recognised over the lease term.
• The interest rate implicit in the lease is defined in such a way that the initial direct costs are included automatically in the net investment
in the lease and they are not added separately.
• Initial direct costs related to finance leases incurred by manufacturer or dealer lessors are expensed at lease commencement.
Operating Lease:
• Ind AS 116 requires lessors to include initial direct costs in the carrying amount of the underlying asset in an operating lease.
• These initial direct costs are recognised as an expense over the lease term on the same basis as lease income.
Finance Leases- Recognition by the Lessor

At the commencement date, a lessor shall recognise assets held under a finance lease in its balance sheet and present them as a receivable
at an amount equal to the net investment in the lease.
Initial Measurement by the Lessor

Journal entry for finance lease
Finance lease receivable Dr. Net investment

To Underlying asset Carrying amount
(Balancing figure is profit or loss)
For finance leases (other than those involving manufacturer and dealer lessors), initial direct costs are included in the initial measurement of
the finance lease receivable, hence are not added separately to the net investment in lease.
Fair value of the underlying asset

Carrying
amount of the
Selling profit underlying
or loss Whichever is lower asset, net
of any
unguaranteed
residual asset
Fair value of the lease receivable
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FINANCIAL REPORTING
Initial Measurement – Manufacturer or Dealer Lessors
• At the commencement date, a manufacturer or dealer lessor recognises selling profit or loss in accordance with its policy for outright sales
to which Ind AS 115 applies.
• Therefore, at lease commencement, a manufacturer or dealer lessor recognises the following:
The fair value of the underlying asset as revenue OR the present value of the lease
payments discounted using a market rate of interest, whichever is lower.
The cost (or carrying amount) of the asset (less) the present value of the unguaranteed
residual value, as cost of sale.
The selling profit or loss in accordance with the policy for outright sales.
• At the commencement date, a manufacturer or dealer lessor recognises selling profit or loss on a finance lease, regardless of whether the
lessor transfers the underlying asset as described under Ind AS 115.
• Costs incurred by a manufacturer or dealer lessor in connection with obtaining a finance lease are recognised as an expense at the
commencement date and are excluded from the net investment in the lease.
Summary-Accounting Treatment in the Books of a Lessor

Particulars Finance Leases Operating Leases
Initial measurement
Balance sheet • Derecognise the carrying amount of the underlying asset • Continue to present the underlying asset
• Recognise the net investment in the lease i.e. a finance lease • Add any initial direct costs incurred in
receivable (equal to the present value of the lease payments to connection with obtaining the lease to the
be received) carrying amount of the underlying asset
• A manufacturer or dealer lessor does
not recognise any selling profit on
entering into an operating lease because
it is not equivalent of a sale
Statement of Profit • Recognise in profit or loss, any selling profit or selling loss
and loss
Subsequent measurement
Balance sheet • Reduce the net investment in the lease for lease payments • Calculate depreciation in accordance
received (net of finance income calculated above) with Ind AS 16 and Ind AS 38
• After lease commencement, the net investment in a lease is • Apply Ind AS 36 to determine whether
NOT REMEASURED UNLESS either: an underlying asset is impaired and to
 The lease is modified and the modified lease is not accounted account for any impairment loss identified
for as a separate contract
OR
 The lease term is revised when there is a change in the non-
cancellable period of the lease
• Recognise any impairment of the net investment in the lease,
if there has been a reduction in the estimated unguaranteed
residual value
Statement of Profit and • Apportion the amount received between the finance income • Recognise lease income over the lease
loss and reduction in receivable term, typically on a straight line basis
• Finance income will be computed to give a constant periodic • Recognise depreciation expense related
rate of return to the underlying asset
• Separately recognises income from variable lease payments • Recognise variable lease payments that
that are not included in the net investment in the lease in the do not depend on an index or rate (e.g.,
period in which that income is earned performance- or usage- based payments)
• Revise the income allocation over the lease term and recognise as they are earned
immediately any reduction in respect of amounts accrued, if
there has been a reduction in the estimated unguaranteed
residual value

96
FINANCIAL REPORTING
Lease Modifications in the Book of Lessor
Finance Lease Modification Operating Lease Modification
The modification increases the scope of the lease by adding A lessor shall account for a
the right to use one or more underlying assets modification to an operating
lease as a new lease from the
effective date of the modification,
considering any prepaid or
The consideration for the lease increases by an amount accrued lease payments relating
commensurate with the standalone price for the increase to the original lease as part of the
in scope lease payments for the new lease
Whether both the conditions are satisfied?

Y N
Modification results into a separate lease, hence Modification

lessor would follow the existing lessor guidance on does not result
initial recognition and measurement as of the effective into a separate
date of lease modification on a prospective basis lease
Whether the lease have been classified as operating with the modifications
at the inception date?
Y N
• Account for the lease modification as a new lease from the Apply the requirements
effective date of the modification; and of Ind AS 109 ‘Financial
• Measure the carrying amount of the underlying asset as the Instruments’ to all other
net investment in the lease immediately before the effective lease modifications
date of the lease modification
Presentation in the Books of Lessor

Finance Leases Operating Leases
• Recognise assets in the balance sheet and present them as a receivable at an amount Present underlying assets according to
equal to the net investment in the lease the nature of that asset in the balance sheet
• Net investment in the lease is subject to the same considerations as other assets in
classification as current or non-current assets in a balance sheet.
Disclosure in the Books of Lessor

The lessor disclosure requirements are more extensive to enable users of financial statements to better evaluate the amount, timing and
uncertainty of cash flows arising from a lessor’s leasing activities.
Quantitative Disclosure Requirements

Finance Leases – Selling profit or loss;
– Finance income on the net investment;
– Income from variable lease payments;
– Qualitative and quantitative explanation of changes in the net investment; and
– Maturity analysis of lease payments receivable.
Operating Leases – Lease income, separately disclosing variable lease payments;
– Disclosure requirements of Ind AS 16 for leased assets, separating leased assets from non-leased assets;
– Other applicable disclosure requirements based on the nature of the underlying asset (eg. Ind AS 36, Ind AS 38,
Ind AS 40 and Ind AS 41); and
– Maturity analysis of lease payments.
Note: The standard prescribes that the quantitative disclosures should be presented in a tabular format, unless another format is more
appropriate to be presented.
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FINANCIAL REPORTING
Qualitative Disclosure Requirements
This disclosure include the nature of the lessor’s leasing activities and how the lessee manages risks associated with those activities,
including risk management on rights retained in underlying assets and risk management strategies including:
– Buy-back agreements;
– Residual value guarantees;
– Variable lease payments for excess use; and
– Any other risk management strategies.
Sub-Leases
Lessor
Sub Head
Lease Original Lessee / Intermediate Lessor / Sub-lessor Lease
Ultimate Lessee / Sub-lessee
Definition A ‘Sub-lease’ is a transaction for which an underlying asset is re-leased by a lessee (‘intermediate lessor’ or ‘sub-
lessor’) to a third party, and the original lease (‘head lease’) between the head lessor and lessee remains in effect.
Treatment In some cases, the sublease is a separate lease agreement while, in other cases, though the third party assumes the
original lease, yet the original lessee remains the primary obligor under the original lease.
Recognition and Intermediate Lessor (sub-lessor)
Measurement • The sublease is classified using the classification criteria BUT, it should be by reference to the ‘ROU Asset’ in the
head lease (and NOT the ‘underlying asset’ of the head lease).
Sublease is a ‘Finance Lease’ Sublease is an ‘Operating Lease’

Balance sheet • Derecognise the ROU Asset on • Continue to account for the lease
the head lease at the sub-lease liability and ROU asset on the head
commencement date lease
• Continue to account for the original • If the total remaining carrying amount
lease liability in accordance with the of the ROU asset on the head lease
lessee accounting model exceeds the anticipated sublease
• Recognise a net investment in the income, this may indicate that the
sublease and evaluate it for impairment ROU asset associated with the head
lease is impaired (as per Ind AS 36)
Statement of Profit • Recognise finance income from sub- • Recognise finance income from sub-
and Loss lease lease
• Charge interest expense on head lease • Charge depreciation and interest
expense on lease liability
• However, when the head lease is a short-term lease, the sublease is classified as an operating lease.
• Lessor may use the discount rate for the head lease (adjusted for initial direct costs, if any, associated with the
sublease) to measure the net investment in the sublease, if the interest rate implicit in the lease cannot be readily
determined.
• When contracts are entered into at or near the same time, an intermediate lessor is required to consider the
criteria for combining contracts. If the contracts are required to be combined, the intermediate lessor accounts
for the head lease and sublease as a single combined transaction.
• An intermediate lessor who subleases, or expects to sublease an asset, CANNOT account for the head lease as a
lease of a low-value asset even when the required criteria w.r.t. ‘leases of low-value assets’ are satisfied.
Sub-lessee Accounting
A sub-lessee accounts for its lease as a new lease following Ind AS 116’s recognition and measurement provisions
for accounting in the books of lessee.
Presentation Intermediate lessors are not permitted to offset
• lease liabilities and lease assets that arise from a head lease and a sublease, respectively, unless those liabilities
and assets meet the requirements in Ind AS 1 for offsetting.
• depreciation and interest expenses and lease income relating to a head lease and a sublease of the same underlying
asset, respectively, unless the requirements for offsetting in Ind AS 1 are met.
Disclosure Entities (including intermediate lessors) are required to disclose qualitative and quantitative information which
gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial
performance and cash flows of the lessor (refer the disclosures for ‘lessors’ and ‘lessees’)

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FINANCIAL REPORTING
Sale and Leaseback Transactions
A sale and leaseback transaction involves two transactions:
• the transfer (sale) of an asset by an entity (the seller-lessee) to another entity (the buyer-lessor) and
• the leaseback of the same asset by the seller-lessee.
How to determine whether the transfer of an asset is a sale:
When determining whether the transfer of an asset should be accounted for as a sale or purchase, both the seller-lessee and the buyer-lessor
shall apply the requirements of Ind AS 115 on when an entity satisfies a performance obligation by transferring ‘control’ of an asset.
If Control is passed If Control is NOT passed

If the control of an underlying asset is passed to the buyer-lessor, If the control of an underlying asset is NOT passed to the buyer-
the transaction is accounted for as a ‘sale or purchase’ of the asset lessor, both the seller-lessee and the buyer-lessor account for the
and a ‘lease’.
transaction as a ‘financing transaction’.
Note: If the seller-lessee has a ‘substantive repurchase option’ for the underlying asset (i.e., a right to repurchase the asset), ‘NO sale’
has occurred because the buyer-lessor has NOT obtained control of the asset.
Accounting Treatment for Sale and Leaseback Transaction

Particulars Seller-lessee Buyer-lessor
Transfer of asset is a Apply accounting for sale • Recognise the underlying asset based on
sale • Recognise the cash received the nature of the asset
• Derecognise the underlying asset • Apply the lessor accounting model to
Apply ROU Accounting leaseback asset
• Apply the lessee accounting model to the leaseback asset
• Measure the ROU asset at the retained portion of the previous
carrying amount
• Recognise a gain or loss related to the portion of the assets
transferred to the buyer-lessor
Transfer of asset is • Continue to recognise the underlying asset • Do not recognise the underlying asset
not a sale • Account for the transaction as financing transaction • Recognise a financial asset under Ind AS
• Recognise a financial liability under Ind AS 109 for any amount 109 for any amount paid to the seller-
received from the buyer-lessor lessee i.e. account for the amount paid as
• Decrease the financial liability by the payments made (as and a receivable
when) less the portion considered as interest expense
Note:
• When a sale occurs, both the seller-lessee and the buyer-lessor account for the leaseback in the same manner as any other lease (with
adjustments for any off-market terms).
• A seller-lessee recognises a lease liability and ROU asset for the leaseback (subject to the optional exemptions for short-term leases and
leases of low-value assets).
An entity shall make the following adjustments to measure the sale proceeds at fair value if:
- the fair value of the consideration for the sale of an asset does not equal the fair value of the asset OR
- the payments for the lease are not at market rates
Following are the two possibilities of the sale price OR the present value of the lease payments being ‘less’ or ‘greater’ than the fair value of the
asset OR present value of the market lease payments:
When Sale Price or Present Value is LESS When Sale Price or Present Value is GREATER
Using the more readily determinable basis: Using the more readily determinable basis:
• When the sale price is LESS than the underlying asset’s fair value • When the sale price is GREATER than the underlying asset’s
OR
fair value OR
• The present value of the lease payments is LESS than the present
value of the market lease payments, • The present value of the lease payments is GREATER than
A seller-lessee recognises the difference as an increase to the sales the present value of the market lease payments,
price and the initial measurement of the ROU asset as a ‘lease A seller-lessee recognises the difference as a reduction in the
prepayment’. sales price and an ‘additional financing received’ from the
buyer-lessor.
Buyer-lessors are also required to adjust the purchase price of the underlying asset for any off-market terms. Such adjustments are
recognised as:
- ‘lease prepayments’ made by the seller-lessee OR
- ‘additional financing provided’ to the seller-lessee.
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FINANCIAL REPORTING
Disclosure
A seller-lessee is also required to disclose any gains and losses arising from sale and leaseback transaction separately from gains and losses on
disposals of other assets under Ind AS 116.
Additional information relating to sale and leaseback transactions depending on the circumstances, may need disclosure that helps users of
financial statements to assess, for e.g.:
(a) The lessee’s reasons for sale and leaseback (b) Key terms and conditions of individual sale and
transactions and the prevalence of those transactions leaseback transactions
(c) Payments not included in the (d) The cash flow effect of sale and leaseback
measurement of lease liabilities transactions in the reporting period
Transition Approach
Transition exemption on lease definition
Either Or
Apply the new definition to all contracts Apply practical expedients and grandfather
assessment for existing contracts and apply the new
definition only to new contracts
Practical Expedient
• This exemption must be applied either for all contracts or none i.e. cherry picking is not permitted
• This exemption does not mean that previously identified operating leases can remain off-balance sheet for lessee (unless qualify for a
recognition exemption). It merely saves the entity the costs and effort of reassessing)
• If the exemption is elected, the new definition of a lease is applied only to contracts entered into or changed on or after initial application
• Disclosure is required if a practical expedient is elected
Transition Options for Lessees
Retrospective approach Modified approach (Do not change

Restate comparatives as comparative financial statements
if Ind AS 116 has always • Recognise difference between asset and liability in opening
been applied Retained Earnings at transition date
• Calculate present value of remaining lease payments for
existing operating leases using incremental borrowing rate
at date of transition
• Choose how to measure ROU asset on lease by lease basis
Operating lease under previous GAAP Finance lease under previous GAAP
ROU Lease liability ROU Lease liability • ROU = Carrying value

• Measure asset as if Ind AS • Measure asset at of previous GAAP
116 had been applied from amount equal to • Lease liability =
lease commencement (but liability (adjusted Carrying value of
using incremental borrowing for accruals and previous GAAP
rate at date of transition) prepayments)
Note:
• A lessee applies Ind AS 36 to ROU assets at the date of initial application, unless the lessee applies the practical expedient for onerous
leases.
• A lessee is not required to make adjustments on transition for ‘leases of low-value assets’ (which is one of the recognition exemptions
under Ind AS 116)

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FINANCIAL REPORTING
Additionally, a lessee is also permitted to apply the following practical expedients to leases previously classified as operating leases (when
applying modified retrospective approach), on a lease-by-lease basis:
Discount Apply a single discount rate to a portfolio of leases with reasonably similar characteristics
rate
Rely on its assessment of whether leases are onerous by applying Ind AS 37 Provisions,
Onerous Contingent Liabilities and Contingent Assets as opposed to performing an impairment
contracts review
Not recognise leases whose term ends within 12 months of the date of initial application
Short term of Ind AS 116. If this election is taken, these leases are accounted for as short-term leases
leases
Exclude initial direct costs from the measurement of right-of-use assets at the date of
Initial initial application
direct cost
Use hindsight, such as in determining the lease term for leases that contain options
Hindsight
Disclosures
Disclosure requirements vary in accordance with the Transition Approach opted. The lessee shall disclose the following as required by
Ind AS 8 (except that it is impracticable to determine the amount of the adjustment):
Full Retrospective Approach Modified Retrospective Approach

(a) the title of the Ind AS; (a) the title of the Ind AS;
(b) when applicable, that the change in accounting policy is made in (b) when applicable, that the change in accounting policy is made in
accordance with its transitional provisions; accordance with its transitional provisions;
(c) the nature of the change in accounting policy; (c) the nature of the change in accounting policy;
(d) when applicable, a description of the transitional provisions; (d) when applicable, a description of the transitional provisions;
(e) when applicable, the transitional provisions that might have an (e) when applicable, the transitional provisions that might have an
effect on future periods; effect on future periods;
(f ) for the current period and each prior period presented, to the (f ) the weighted average lessee’s incremental borrowing rate
extent practicable, the amount of the adjustment: applied to lease liabilities recognised in the balance sheet at the
(i) for each financial statement line item affected; and date of initial application; and an explanation of any difference
between:
(ii) if Ind AS 33 Earnings per Share applies to the entity, for
basic and diluted earnings per share; (i) operating lease commitments disclosed applying Ind AS
17 at the end of the annual reporting period immediately
preceding the date of initial application, discounted using
the incremental borrowing rate at the date of initial
application; and
(ii) lease liabilities recognised in the balance sheet at the date of
initial application.
(g) the amount of the adjustment relating to periods before those (g) the amount of the adjustment relating to periods before those
presented, to the extent practicable; and presented, to the extent practicable; and
(h) if retrospective application required by Ind AS 8 is impracticable (h) if retrospective application required by Ind AS 8 is impracticable
for a particular prior period, or for periods before those for a particular prior period, or for periods before those
presented, the circumstances that led to the existence of that presented, the circumstances that led to the existence of that
condition and a description of how and from when the change condition and a description of how and from when the change
in accounting policy has been applied. in accounting policy has been applied.
Further, if a lessee uses one or more of the practical expedients
(already discussed above), it shall disclose that fact.
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FINANCIAL REPORTING
Transition Options for Lessors
• A lessor is not required to make any adjustments on transition for leases in which it is a lessor and account for those leases applying
Ind AS 116 from the date of initial application.
• However, in case of an ‘Intermediate Lessor’, the entity shall:
(a) reassess subleases that were classified as operating leases applying Ind AS 17 and are ongoing at the date of initial
application, to determine whether each sublease should be classified as an operating lease or a finance lease applying Ind AS 116.
The intermediate lessor shall perform this assessment at the date of initial application on the basis of the remaining contractual
terms and conditions of the head lease and sublease at that date with reference to the ROU Asset associated with the head lease
and not the underlying asset.
(b) for subleases that were classified as operating leases applying Ind AS 17 but, finance leases applying Ind AS 116, account
for the sublease as a new finance lease entered into at the date of initial application. Any gain or loss arising on the sublease
arrangement is included in the cumulative catch-up adjustment to retained earnings at the date of initial application.
Sale and Leaseback Transactions before the date of Initial Application

• An entity shall not reassess sale and leaseback transactions entered into before the date of initial application to determine whether the
transfer of the underlying asset satisfies the requirements under Ind AS 115 to be accounted for as a sale.
• Leaseback is accounted for on transition in the following manner, depending on the classification:
Finance Lease Operating Lease

If a sale and leaseback transaction was accounted for as a sale and a If a sale and leaseback transaction was accounted for as a sale and
finance lease applying Ind AS 17, the seller-lessee shall: operating lease applying Ind AS 17, the seller-lessee shall:
(a) account for the leaseback in the same way as it accounts for any (a) account for the leaseback in the same way as it accounts for any
other finance lease that exists at the date of initial application other operating lease that exists at the date of initial application;
AND AND
(b) continue to amortise any gain on sale over the lease term. (b) adjust the leaseback ROU asset for any deferred gains or losses
that relate to off-market terms recognised in the balance sheet
immediately before the date of initial application.
Amounts Previously Recognised in respect of Business Combinations

The lessee shall
• Derecognise the acquired asset or liability and
• Adjust the carrying amount of the ROU asset by a corresponding amount at the date of initial application.
Amendment in Accounting of Rent Concessions arising due to COVID-19 Pandemic
Following amendments have been made with respect to accounting of COVID-19 related rent concessions such as rent holidays and
temporary rent reductions:
As a practical expedient, a lessee may elect not to assess a rent concession as a lease modification only if ALL of the following conditions
are met:
a) the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the
consideration for the lease immediately preceding the change;
b) any reduction in lease payments affects only payments originally due on or before the 30th June, 2022* (for example, a rent
concession would meet this condition if it results in reduced lease payments on or before the 30th June, 2022* and increased lease
payments that extend beyond the 30th June, 2022*); and
c) there is no substantive change to other terms and conditions of the lease.
A lessee that makes this election shall account for any change in lease payments resulting from the rent concession as if the change were
not a lease modification.
Note: The above practical expedient applies only to rent concessions occurring as a direct consequence of the covid-19 pandemic.
*As per the amendment made by the MCA on 18th June, 2021.

102
FINANCIAL REPORTING
The key conditions for applying the practical expedient are as follows:
No
Is rent concession a direct consequence of the COVID-19 pandemic?
Yes
No
Is the revised consideration for the lease substantially the same as, or less
than, the consideration for the lease immediately preceding the change?
Yes
No
Does the rent concession affects only lease payments originally due
on or before 30 June 2022?
Yes
No
No substantive changes to the other terms and conditions of the lease?
Yes
No practical expedient applicable. Practical expedient applicable. Hence,

Hence, accounting will be done as lease lessee may elect not to assess rent
modification concessions as a lease modification
Disclosures
Lessees applying practical expedient are required to disclose:
a. The fact that if they have applied the practical expedient to all eligible rent concessions and, if not, the nature of contracts to which they
have applied the practical expedient and
b. The amount recognized in profit or loss for the reporting period to reflect changes in lease payments that arise from rent concessions
to which the lessee has applied the practical expedient.
Note: The disclosure requirements of paragraph 28(f ) of Ind AS 8 do not apply on initial application of these amendments.
103
FINANCIAL REPORTING
This capsule in Final Paper 1 Financial Reporting is seventh in the series. Many of the Ind AS have already been covered
in the capsules on Financial Reporting published in July, 2018, May, 2019 and August, 2019, October, 2019, November,
2020 and July/August, 2021 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
significant provisions of Ind AS 103 through pictorial/tabular presentations for better understanding and quick revision.
Students are advised to refer the study material or bare text of Ind AS 103 for comprehensive study and revision. Under no
circumstances, this capsule substitute the detailed study of the material provided by the Board of Studies.
Indian Accounting Standard (Ind AS) 103 : business combinations

Overview of Ind AS 103: Business Combinations
Definition and Acquisition Subsequent Measurement Common Control

Disclosures
Elements Method and Accounting Transactions
Identifying Reacquired rights

Of Business the acquirer
Combination
Contingent liabilities
Determining the
acquisition date
Indemnification of assets
Of Business Purchase
Consideration Contingent consideration
Determination of Purchase consideration Allocation of Purchase Consideration Recognition and Measurement of
Identifiable assets acquired and Goodwill or gain from a Non-controlling interest

the liabilities assumed bargain purchase in the acquiree
Objective
To improve the relevance, reliability and comparability of the information provided in the
financial statements about a business combination and its effects
To accomplish that, this Ind AS establishes principles and requirements for how the acquirer, in its financial statements
Recognises and measures Determines what information to disclose to enable users
Identifiable Liabilities Any non-controlling Goodwill acquired in the business To evaluate the nature and
assets acquired assumed interest in the combination or a gain from a financial effects of the
acquiree bargain purchase business combination
Scope
This Ind AS applies to a transaction or other event that meets the definition of a business combination
This Ind AS does not apply to:
Accounting for Acquisition of an asset Acquisition by an investment Combination of entities

formation of a joint or group of assets that entity in subsidiary which is or businesses under
arrangements is not a business measured at FVTPL common control
• In such cases the acquirer shall identify and recognise the individual identifiable assets acquired and
liabilities assumed
• The cost of the group shall be allocated to the individual identifiable assets and liabilities on the basis of their
relative fair values at the date of purchase
• No goodwill arises in asset acquisition
The Chartered Accountant Student October 2021 05

104
FINANCIAL REPORTING
An entity shall account for each business combination by applying the Acquisition Method
Steps for Accounting of Business Combination (Acquisition Method)
identify a business combination

1
identify the acquirer
2
determine acquisition date

3
recognise/measure identifiable assets acquired/liabilities assumed

4
recognise/measure any non-controlling interest

5
identify and measure consideration transferred

6
determine goodwill or gain on a bargain purchase
7
Identifying a Business Combination
Is there a transaction or event in which acquirer obtains control* over a business**?
Yes No
It is a Business Combination It is an Asset Acquisition
• Power over the investee

Control* • Exposure, or rights to variable returns
• Ability to use its power over the investee to affect the amount of investor returns
• Integrated set of activities and assets

Business** • Capable of being conducted and managed for the purpose of providing goods
or services to customers, generating investment income (such as dividends or
interest) or generating other income from ordinary activities
A business combination may be structured in a variety of ways for legal, taxation or other reasons, which include but are not
limited to:
(a) one or more businesses become subsidiaries of an acquirer or the net assets of one or more businesses are legally merged
into the acquirer
(b) one combining entity transfers its net assets, or its owners transfer their equity interests, to another combining entity or its
owners
(c) all of the combining entities or its owners transfer their net assets or equity interest, to a newly formed entity
(d) a group of former owners of one of the combining entities obtains control of the combined entity.
An acquirer might obtain control of an acquiree in a variety of ways, for example:

(a) by transferring cash, cash equivalents or other assets (including net assets that constitute a business)
(b) by incurring liabilities
(c) by issuing equity interests
(d) by providing more than one type of consideration
(e) without transferring consideration, including by contract alone
06 October 2021 The Chartered Accountant Student
105
FINANCIAL REPORTING
Business Elements
(It generally consists of:)
Inputs Inputs and processes are

(economic resource that creates, or has the ability to create, outputs) mandatorily required:
• Inputs (e.g. employees, non
current assets)
Process • Processes (e.g. strategic/
(Any system, standard, protocol, convention or rule that when applied to an input or operation management)
inputs, creates or has the ability to create outputs.)
Outputs are not mandatorily
required for a set of activities
and assets to qualify as a
Output
business.
(The result of inputs and processes applied to those inputs that provide or have the
ability to provide a return in the form of dividends, lower costs or other economic • Development stage activities
benefits directly to investors or other owners) without outputs may still be
businesses
Goodwill :
There is a presumption that if goodwill exists, the acquisition is a business.
But
A business need not necessarily have goodwill
Meaning of a Business
A business need not include all the inputs or processes that the seller used in operating that business
If a market participant is capable of utilising the acquired set of activities and assets to produce outputs by
integrating the acquired set with its own inputs and processes, the acquired set might constitute a business
If the elements that are missing from an acquired set are not present with a market participant but easily
replaced/replicated, the acquired set might still be a business
The acquired set of activities and assets must have at least some inputs and processes in order to be
considered a business
Definition of a Business: Development Stageof a set of Activities and Assets
Is the transferred set of activities and assets a business?
Factors include but are not limited to whether the set:

• Has begun its planned principal activities
• Has employees, intellectual property and other inputs and processes that could be applied to those
inputs
• Is pursuing a plan to produce outputs
• Will be able to obtain access to customers that will purchase the outputs
Determination should be based on whether the integrated set is capable of being conducted and managed as
a business by a market participant (rather than the specific acquirer)

106
FINANCIAL REPORTING
Further Assessment to Determine Whether Transaction is Business or not:
No
Acquired
Inputs GO T O A
and
Processes GO TO B
Yes
Yes Yes
Whether it is critical to the Whether acquired process is

ability to continue producing unique/scarce or cannot be
GO TO A
outputs and the inputs replaced without significant
acquired include an organized No cost, effort, or delay? No
Whether experienced workforce to
Outputs Yes
perform that process
exist at
acquisition Whether the inputs acquired
date? include both an organized
Whether it is critical to the workforce to perform that
ability to develop/convert process AND include other GO TO B
acquired input or inputs into inputs the workforce could
outputs? Yes develop/convert into outputs? Yes
No
No No
No substantive It is an asset GO TO A
A process acquired acquisition
Substantive It is a business
B process acquired combination
Concentration Test
An optional test (the concentration test) has been introduced in Ind AS 103 to permit a simplified assessment of whether an acquired set
of activities and assets is not a business.
On the basis of the above test, following will be the consequences:
Test is met Test is not met
Not a business Further

assessment
to be made
No further
assessment is
needed
• Optional test is to identify concentration of fair value

• An entity may make such an election separately for each transaction or other event
• The concentration test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable
asset or group of similar identifiable assets
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FINANCIAL REPORTING
Differences in Accounting for Business Combination Vs. Asset Acquisition
Impact on Business combination Asset acquisition
Intangible assets Intangible assets are recognised at fair Intangible assets acquired as part of a
value, if they are separately identifiable group of assets would be recognised
and measured based on an allocation of
the overall cost of the transaction with
reference to their relative fair values
Goodwill Goodwill (or gain on bargain purchase) No goodwill is recognized
may arise
Initial measurement of assets acquired and Fair value Allocated cost (on a relative fair value
liabilities assumed basis)
Directly attributable transaction costs Expensed Capitalised
Deferred tax on initial recognition Recognised Not recognized
Contingent liabilities assumed To be recognised if represents present Not recognised, subject to Ind AS 37
obligation that arises from past events and
its fair value can be measured reliably with
subsequent changes to profit or loss
Disclosures More extensive Less disclosures required
All business combination within the scope of Ind AS 103 are accounted under the
acquisition method (also known as purchase method)
Identifying the Acquirer
For each business combination and in order to apply the purchase method, one of the
combining entities shall be identified as the acquirer
The guidance in Ind AS 110 shall be used to identify the acquirer
As per Ind AS 110, an investor controls an investee if and only if the investor has all the following:
Power over the Exposure, or The ability to use Control over the
investee rights, to variable its power over the Investee
returns from its investee to affect
involvement with the amount of the
the investee investor’s returns
Note: The above definition is very wide and control assessment does not depend only on voting rights instead it
depends on other factors as well, which are discussed in detail in Ind AS 110
If applying the guidance in Ind-AS 110 does not clearly indicate the acquirer, the following factors are considered in
making the determination :
Acquirer is usually the Acquirer is usually the entity that issues its The entity whose size is
entity that transfers the equity interests significantly greater than
cash or other assets or [Note: However, in some business that of the other combining
incurs the liabilities combinations, commonly called ‘reverse entity or entities
acquisitions’, the issuing entity is the acquiree]
Acquirer normally has the largest portion of the voting rights in the combined entity
(consider the existence of any unused or special voting arrangements and options,
warrants or convertible securities)
Existence of a large minority voting interest in the combined entity if no other owner
or organised group of owners has a significant voting interest
Acquirer will have ability to elect or appoint or to remove a majority of the members
of the governing body of the combined entity
The acquirer is usually the combining entity whose (former) management dominates
the management of the combined entity
The acquirer is usually the combining entity that pays a premium over the pre-
combination fair value of the equity interests of the other combining entity or entities

108
FINANCIAL REPORTING
Date of Acquisition
The date on which the acquirer obtains control of the acquiree (as identified by the acquirer)
In general, the date of obtaining the control is

the date on which the acquirer legally transfers the
consideration, acquires the assets and assumes the
liabilities of the acquiree
However, the acquirer might obtain control on a date that is either earlier or later than the closing date
Classification
The acquirer classifies and designates assets and liabilities at acquisition date based on:
– acquirer's economic conditions
– contractual terms of the assets/liabilities
– acquirer's operating or accounting policies
– other pertinent conditions existing at the acquisition date
Exception to the classification:

• classification of a lease contract in which acquiree is the lessor as either an operating lease or a finance lease in accordance
with Ind AS 116, Leases
• Classification of a contract as an insurance contract in accordance with Ind AS 104, Insurance Contracts
The acquirer shall classify those contracts on the basis of the contractual terms and other factors at the inception of the contract
(and not on the acquisition date)
Recognition and Measurement Principle
At the acquisition date, the acquirer shall recognise, separately from goodwill:
- the identifiable assets acquired
- the liabilities assumed and
- any non-controlling interest in the acquiree
Exceptions to recognition principle: contingent liabilities, deferred taxes, employee benefits, assets indemnifications, leases in
which acquiree is the lessee
The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values
Exceptions to measurement principle: deferred taxes, employee benefits, assets indemnifications, leases in which acquiree is
the lessee, reacquired rights, share-based payments, assets held for sale
For recognition of identifiable assets acquired/ liabilities assumed as part of the acquisition method, these assets/ liabilities
• must meet the definitions of assets and liabilities in the Framework issued by ICAI at the acquisition date
• must be part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination transaction
The acquirer shall determine which assets acquired or liabilities assumed, if any, are the result of separate transactions, they are
to be accounted for in accordance with their nature and the applicable Ind AS
The acquirer’s application of the recognition principle and conditions may result in recognising some assets and liabilities that the
acquiree had not previously recognised as assets and liabilities in its financial statements
109
FINANCIAL REPORTING
Exceptions to Recognition
& Measurement Principles
Limited to acquisition date accounting
An asset or liability which otherwise would The assets and liabilities are measured at a value
not have been recorded gets recorded other than the acquisition date fair values
Both Recognition and Measurement

Recognition Exceptions
Measurement exceptions exceptions
Contingent Income Employee Indemnification Lessees in which the

liabilities Taxes benefits assets acquiree is the lessee
Recognise if its Recognise and Recognise and Recognise and measure

fair value can be measure as per measure as per at the acquisition date
measured reliably Ind AS 12 Ind AS 19 at its fair value
• Recognise ROU assets and lease liabilities as per Ind AS 116 except short term lease or low value
lease
• Measure the lease liability at present value of remaining lease payments as a new lease at the
acquisition date
• Measure ROU assets at same amount as lease liability
Share based payment awards Assets held for sale Reacquired rights
Measured as per Measured as per Ind AS Measured on the basis

Ind AS 102 at the 105 at the acquisition date of remaining contractual
acquisition date at fair value less cost to sell term of related contract

110
FINANCIAL REPORTING
Recognising Particular Assets Acquired and Liabilities Assumed
For recognition Intangible The acquirer shall recognise, separately from goodwill, the identifiable intangible
purposes assets assets acquired in a business combination
An intangible asset is identifiable if it meets either the separability criterion or the

contractual-legal criterion
An acquirer may reacquire a right that it had previously granted to the acquiree to use one or
Reacquired rights
more of the acquirer’s recognised or unrecognised assets
A reacquired right is an identifiable intangible asset that the acquirer recognises separately from
goodwill
Assembled workforce
and other items that The acquirer subsumes into goodwill the value of an acquired intangible asset that is not
are not identifiable identifiable or not qualifies as assets as of the acquisition date
Operating The acquirer shall recognise assets or liabilities related to an operating lease in
For measurement leases in which the acquiree is the lessor
purposes which the
acquiree is
the lessee The acquirer does not recognise a separate asset or liability if the terms of an
operating lease are either favourable or unfavourable when compared with the
market terms
Recognising and Measuring Goodwill or Gain from Bargain Purchase
Consideration Non Acquisition date fair Fair value of net

Goodwill transferred Controlling value of acquirer’s identifiable assets
Interests (NCI) previously held at the acquisition
equity interest date
At Fair value At Proportionate share in

OR the recognized amounts of
acquiree’s identifiable net assets
• NCI is equity in a subsidiary not attributable, directly or indirectly

to a parent
• Measurement option for NCI is done at acquisition date
• Choice is made for each business combination (not a policy choice)
Note:
“Bargain Purchase” is accounted when sum total of fair value of net assets and NCI exceeds consideration transferred
In case of bargain purchase, the acquirer should reassess whether it has correctly identified all of the assets acquired and all of the
liabilities assumed
• If reassessment confirms bargain purchase, any gain is recognized in equity as capital reserve (routed through OCI) on the
acquisition date.
• However, if there does not exist clear evidence of the underlying reasons for classifying the business combination as a bargain
purchase, the gain (bargain purchase) should be recognised directly in equity as capital reserve.
To determine the amount of goodwill in a business combination in which no consideration is transferred, the acquirer shall use the
acquisition-date fair value of the acquirer’s interest in the acquiree in place of the acquisition-date fair value of the consideration transferred
Note:
Acquisition related costs charged to P&L except, debt securities issue cost–incorporated in effective interest rate (Ind AS 109) and
Equity issue cost recognized in equity (Ind AS 32).
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FINANCIAL REPORTING
Consideration Transferred
Consideration transferred is the sum of the acquisition-date fair values of:
Assets transferred Liabilities incurred by Equity interests

by the acquirer the acquirer to former issued by the
owners of the acquiree acquirer
Note: Any portion of the acquirer’s share-based payment awards exchanged for awards held by the acquiree’s employees that
is included in consideration transferred in the business combination shall be measured in accordance with Ind AS 102 rather
than at fair value.
It also includes acquisition date fair value of contingent consideration
Examples of potential forms of consideration include cash, other assets, a business or a subsidiary of the acquirer, contingent
consideration, ordinary or preference equity instruments, options, warrants and member interests of mutual entities.
If the carrying amount of transferred assets / liabilities differ from fair value, AND
Whether they remain within the combined entity after business combination? (for example the assets or liabilities were
transferred to the acquiree rather than to its former owners)
Yes No
• Measure those assets and liabilities at • Remeasure the transferred

their carrying amounts immediately assets or liabilities to their fair
before the acquisition date values as of the acquisition date
• Gain or Loss is not recognized in Profit • Gain or Loss is recognized in
or Loss (when acquirer controls the Profit or Loss
assets or liabilities both before and after
the combination)
Acquisition-Related Costs
Definition Acquisition-related costs are costs that the acquirer incurs to effect a business combination
Those costs include finder’s fees; advisory, legal, accounting, valuation and other professional or consulting
Examples fees; general administrative costs, including the costs of maintaining an internal acquisitions department;
and costs of registering and issuing debt and equity securities
Accounting The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are
treatment incurred and the services are received
Exception The costs to issue debt or equity securities shall be recognised in accordance with Ind AS 32 and Ind AS 109

112
FINANCIAL REPORTING
It is the obligation by the acquirer to transfer

Contingent Consideration additional assets or equity interest, if specified
future events occur or conditions are met
For changes occurred during the measurement period,

Initial recognition at fair value the acquirer shall retrospectively adjust the provisional
amounts recognised at the acquisition date
Equity Other contingent consideration
Not re-measured
Within the scope Not within the scope of

Subsequent settlement is of Ind AS 109 Ind AS 109
accounted for within equity
Measured at fair Changes in fair value Measured at fair Changes in fair value
value at is recognised in value at each is recognised in
each reporting date profit or loss reporting date profit or loss
A Business Combination Achieved in Stages
An acquirer may obtain the control of an acquiree in stages, by successive purchases of shares (commonly referred to as a ‘step
acquisition’)
When a party to a joint arrangement obtains control of a business that is a joint operation and had rights to the assets and
obligations for the liabilities relating to that joint operation immediately before the acquisition date, the transaction is a
business combination achieved in stages
The acquirer shall remeasure its entire previously held interest in the joint operation as follows:
If the acquirer holds a non-controlling equity investment in the acquiree immediately before obtaining control:
Remeasure investment to fair value as at the date of gaining control
Recognise any gain or loss on remeasurement in profit or loss or OCI, as appropriate
In prior periods, whether the acquirer had recognised changes in the value of the equity interest in OCI?
Yes No
Amount that was recognised in OCI should Any resulting gain or loss is
be recognised on the same basis as would recognised in profit or loss
be required if the acquirer had disposed
directly of the previously held equity interest
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FINANCIAL REPORTING
A Business Combination Achieved Without the Transfer of Consideration
The acquisition method of accounting applies to such business combinations
It includes following circumstances:
The acquiree repurchases a sufficient number of its own shares for an existing investor (the acquirer) to obtain
control
Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the acquirer held
the majority voting rights
The acquirer and acquiree agree to combine their businesses by contract alone
Example: Bringing two businesses together in a stapling arrangement or forming a dual listed
corporation
The equity interests in the acquiree held by parties other than the acquirer are a non-controlling interest in the acquirer’s
post-combination financial statements even if the result is that all of the equity interests in the acquiree are attributed to the
non-controlling interest
Measurement Period
It is the period after the acquisition date during which the acquirer may adjust the provisional amounts
Definition
recognized for a business combination
It ends as soon as the acquirer receives the information it was seeking about facts and circumstances that
Duration
existed as of the acquisition date or learns that more information is not obtainable
Note: The measurement period shall not exceed one year from the acquisition date
Accounting / Adjustment:
Information that
• Retrospectively adjust the provisional amounts
existed at the
• Recognise new assets/liabilities to reflect the new information
acquisition date
• Adjust the goodwill accordingly
Information Accounting / Adjustment:

Time of occurred during • Include adjustments for such developments after the acquisition date but during
occurrence of the measurement the measurement period only (like changes in estimates)
information and period • Prospectively adjust the provisional amounts to reflect new information arising
its accounting/ after the acquisition date
adjustment • No adjustment to goodwill
• Correct the errors retrospectively in accordance with Ind AS 8
Post- Accounting / Adjustment:

measurement • No adjustment to the accounting for the business combination
period • Accounting for a business combination is amended only to correct an error as
information per Ind AS 8

114
FINANCIAL REPORTING
Measurement Period Review
Whether conditions existed on

acquisition date?
Yes No
Whether information pertaining to No

business acquisition obtained within Recognise increase/decrease in
1 year of acquisition date? asset or liability as error as per
applicable Ind AS.
Yes
Then recognise increase/decrease in

identifiable asset or liability by giving
corresponding effect in Goodwill.
Determining what is Part of the Business Combination Transaction
The acquirer and the acquiree may have a pre-existing The acquirer and the acquiree may enter into an
relationship or other arrangement before negotiations OR arrangement during the negotiations that is separate
for the business combination began from the business combination
In either situation, the acquirer shall identify any amounts that are not part of what the acquirer and the acquiree (or its former
owners) exchanged in the business combination, ie amounts that are not part of the exchange for the acquiree
The acquirer shall recognise as part of applying the acquisition method only the consideration transferred for the acquiree and
the assets acquired and liabilities assumed in the exchange for the acquiree
Separate transactions shall be accounted for in accordance with the relevant Ind AS
A transaction entered into by or on behalf of the acquirer or primarily for the benefit of the acquirer or the combined entity,
rather than primarily for the benefit of the acquiree (or its former owners) before the combination, is likely to be a separate
transaction
The following are examples of separate transactions that are not to be included in applying the acquisition method:
a transaction that a transaction that a transaction that reimburses

in effect settles pre- remunerates employees the acquiree or its former
existing relationships or former owners of owners for paying the
between the acquirer the acquiree for future acquirer’s acquisition-
and acquiree services related costs
The acquirer should consider the following factors, which are neither mutually exclusive nor individually conclusive, in
determining whether the transaction is separate from business combination:
Reasons for the transaction Who initiated the transaction? Timing of the transaction
115
FINANCIAL REPORTING
Accounting for a Pre-existing Relationship
Types of Pre-existing Relationships
Non-contractual (e.g. Legal Suit) Contractual (e.g. Supply Agreement) Reacquired right (e.g. Franchise Agreement)
Lesser
of
Fair Value
Fair Value based

Favourable/ on remaining
Measurement Stated Settlement
Unfavourable contractual term
Provisions
contract position (without renewals)
Profit & Loss, not goodwill Capitalised and amortised
Contingent Payments to Employees or Selling Shareholders
To identify an arrangement for payments to employees or selling shareholders is part of the exchange for the acquiree or is a
transaction separate from the business combination, the acquirer should consider the following indicators:
Duration of continuing
Continuing employment Level of remuneration
employment
Incremental payments
Number of shares owned Linkage to the valuation
to employees
Formula for determining Other agreements and

consideration issues

116
FINANCIAL REPORTING
Acquirer Share Based Payment Awards Exchanged for Awards Held by the Acquiree’s Employees
Business combination An acquirer may exchange its share-based payment awards (replacement awards) for awards held by
transaction employees of the acquiree
Nature of awards The above share based payment awards will include vested and unvested shares
Exchanges of share options or other share-based payment awards in conjunction with a business
Type of Accounting
combination are accounted for as modifications of share-based payment awards as per Ind AS 102
To allocate the replacement award's value between the amounts attributable to:
Objective of • pre-combination service (treated as part of consideration transferred)
Accounting • post-combination service (accounted for as compensation expense in the post combination financial
statements)
Pre- Market-based Completed Greater of total

combination measure of vesting period original vesting
period the acquiree as on the period or total revised
service cost award acquisition date vesting period
Accounting
Post-
combination Market based Amount attributed
period measure of the to pre combination
service cost replacement award service
Market based measure means that awards will be

re-measured on the acquisition date as per the
requirements of Ind AS 102
• The acquirer shall attribute a portion of a replacement award to post

combination service if it requires post combination service, regardless of
whether employees had rendered all of the service required for their acquiree
awards to vest before the acquistion date
• Changes in the estimated number of replacement awards expected to vest

Important Notes are reflected in remuneration cost for the periods in which the changes or
forfeitures occur not as adjustments to the consideration transferred in the
business combination.
• The effects of other events, such as modifications or the ultimate outcome

of awards with performance conditions, that occur after the acquisition date
are accounted for as per Ind AS 102 in determining remuneration cost for the
period in which an event occurs
• Requirements for determining the portions of a replacement award attributable

to pre‑combination and post‑combination service apply regardless of whether
a replacement award is classified as a liability or as an equity instrument as per
Ind AS 102
• The income tax effects of replacement awards of share‑based payments shall be

recognised as per Ind AS 12
117
FINANCIAL REPORTING
Equity-Settled Share-Based Payment Transactions of the Acquiree
Acquiree may have outstanding share-based payment transactions that the acquirer does not exchange for its share-based
payment transactions
Acquiree’s existing award will be settled in its own shares and the consequential shareholders will become the Non-controlling
shareholders
Accounting
Vested shares Unvested shares
Measured at their Such acquiree Pre-combination Post-combination

market‑based share‑based period period
measure and the payment
value credited to transactions
Share based payment are part of Considered as a Debited as employee cost
reserve NCI part of NCI and credited to NCI in the
balance sheet
Market- Completed Greater of total

b a s e d vesting period original vesting Market based A m o u n t
measure of as on the period or total measure of the attributed to pre
the acquiree acquisition revised vesting replacement combination
award date period award service
Subsequent Measurement and Accounting
An acquirer shall subsequently measure and account for assets acquired, liabilities assumed or incurred and equity instruments
issued in a business combination in accordance with other applicable Ind AS
Exception: Ind AS 103 provides guidance on subsequently measuring and accounting for the following assets acquired, liabilities
assumed or incurred and equity instruments issued in a business combination
Reacquired Contingent liabilities Indemnification Contingent

rights recognised as of the assets consideration
acquisition date
• Recognised as an On subsequent After initial It results when the seller Refer chart
intangible asset selling to a third party, recognition and in a business combination given earlier
• Amortised over acquirer shall include until the liability is contractually indemnifies the in this chapter
the remaining the carrying amount settled, cancelled or acquirer for the outcome of on contingent
contractual period of of the intangible asset expired, the acquirer a contingency or uncertainty consideration
the contract in which in determining the shall measure it at related to all or part of a
the right was granted gain or loss on the sale the higher of specific asset or liability
The amount that would be

In each subsequent reporting period, the acquirer shall
recognised as per Ind AS 37
• Measure an indemnification asset on the same basis as the
indemnified liability or asset
The amount initially • For an indemnification asset that is not subsequently
recognised less the cumulative measured at its fair value, management needs to do
amount of income recognised assessment of its collectability
as per Ind AS 115 • Derecognise the indemnification asset only when it collects
the asset, sells it, or otherwise loses the right to it

118
FINANCIAL REPORTING
Other Ind AS that Provide Guidance on Subsequent Measurement and
Accounting in a Business Combination
• Ind AS 38 prescribes the accounting for identifiable intangible assets acquired in a business combination
• The acquirer measures goodwill at the amount recognised at the acquisition date less any accumulated impairment losses.
Ind AS 36 prescribes the accounting for impairment losses
Ind AS 104 provides guidance on the subsequent accounting for an insurance contract acquired in a business combination
Ind AS 12 prescribes the subsequent accounting for deferred tax assets (including unrecognised deferred tax assets) and liabilities
acquired in a business combination
Ind AS 102 provides guidance on subsequent measurement and accounting for the portion of replacement share-based payment
awards issued by an acquirer that is attributable to employees’ future services
Ind AS 110 provides guidance on accounting for changes in a parent’s ownership interest in a subsidiary after control is obtained
Common Control Business Combinations
Applicable Appendix C of Ind AS 103 deals with accounting for business combinations of entities or businesses under
pronouncement common control
It is a business combination involving entities or businesses in which all the combining entities or
Definition businesses are ultimately CONTROLLED by the SAME party or parties both BEFORE and AFTER the
business combination, and that control is not transitory
Common control business combinations will include transactions, such as transfer of subsidiaries or
Inclusion
businesses, between entities within a group
• The extent of NCI in each of the combining entities before and after the business combinations is not
Role of NCI relevant to determine whether a combination involves entities under common control
• Partially owned subsidiary is always under the control of the parent entity
It is not necessary that combining entities are included as part of the same CFS
Scope
A group of individuals shall be considered as controlling an entity when, as a result of contractual
arrangements, they collectively have the power to govern its financial and operating policies so as to
obtain benefits from its activities, and that ultimate collective power is not transitory
Accounting Business combinations involving entities or businesses under common control shall be accounted for
using the pooling of interests method
119
FINANCIAL REPORTING
Method of Accounting for Common Control Business Combinations
Business combinations involving entities or businesses under common control shall be accounted for using the pooling of
interests method
Assets and liabilities of the combining entities are reflected at their carrying amounts
Only adjustments that are made are to harmonise accounting policies
No adjustments are made to reflect fair values, or recognize any new assets or liabilities
No 'new' goodwill is recognized as a result of the combination
Any expenses of the combination are written off immediately in the P&L
Financial information in financial statements in respect of prior periods should be restated as if business combination had
occurred from beginning of preceding period in financial statements, irrespective of actual date of combination
However, if business combination had occurred after that date, prior period information shall be restated only from that date
• Consideration for business combination may consist of securities, cash or other assets
• Securities shall be recorded at nominal value
• Assets other than cash shall be considered at their fair values
Identity of reserves shall be preserved and shall appear in financial statements of transferee in same form in which they
appeared in financial statements of transferor
General Reserve of the transferor entity becomes the General Reserve of the transferee, the Capital Reserve of the transferor
becomes the Capital Reserve of the transferee and the Revaluation Reserve of the transferor becomes the Revaluation Reserve of
the transferee. As a result of preserving the identity, reserves which are available for distribution as dividend before the business
combination would also be available for distribution as dividend after the business combination.
Difference, if any, between amount recorded as share capital issued plus any additional consideration in form of cash or other
assets and amount of share capital of transferor shall be transferred to capital reserve and should be presented separately from
other capital reserves with disclosure of its nature and purpose in the notes

120
FINANCIAL REPORTING
Summary of Accounting for Common Control Business Combination

S. No. Particular Treatment
1. Method of accounting Pooling of interests method
2. Assets and liabilities of transferor company taken over by the At carrying values
transferee company
3. Adjustments in accounting of business combination Adjustments are made only to harmonise the accounting
policies
4. Financial information in financial statements in respect of prior Restated as if business combination had occurred from
periods beginning of preceding period in financial statements,
irrespective of actual date of combination.
However, if business combination had occurred after that
date, prior period information shall be restated only from
that date.
5. Reserves of transferor company Identities are preserved and shall appear in financial
statements of transferee in same form in which they
appeared in financial statements of transferor company
6. Goodwill Not recognised
7. Expenses incurred on combination of business Written off immediately in the Profit and Loss account
8. Purchase Consideration (PC) Consists of securities, cash or other assets
9. Securities given under purchase consideration Recorded at nominal value
10. Assets other than cash given under purchase consideration Considered at their fair values
11. Cash given under purchase consideration Actual value
12. Difference, if any, between amount recorded as share capital Transferred to capital reserve and should be presented
issued plus any additional consideration in form of cash or separately from other capital reserves with disclosure of its
other assets and amount of share capital of transferor
nature and purpose in the notes
Reverse Acquisitions
Issued equity shares
Say Entity A Say Entity B
Legal Acquirer Legal Acquiree
Issues no consideration
Identified as Identified as
Accounting Acquiree Accounting Acquirer
For accounting,
measure the
consideration as
Acquisition date fair value of Fair value of the number of equity interests
the consideration transferred the legal subsidiary (Entity B) would have had
by the accounting acquirer for to issue to give the owners of the legal parent
its interest in the accounting (Entity A) the same percentage equity interest
acquiree in the combined entity that results from the
reverse acquisition
121
FINANCIAL REPORTING
Preparation and Presentation of Consolidated
Financial Statements (Reverse Acquisitions)
Consolidated financial statements prepared following a reverse acquisition are issued under the name of the legal parent (accounting
acquiree)
But it is described in the notes as a continuation of the financial statements of the legal subsidiary (accounting acquirer), with
one adjustment, which is to adjust retroactively the accounting acquirer’s legal capital to reflect the legal capital of the accounting
acquiree. That adjustment is required to reflect the capital of the legal parent (the accounting acquiree).
Comparative information presented in those consolidated financial statements also is retroactively adjusted to reflect the legal capital
of the legal parent (accounting acquiree).
Because the consolidated financial statements represent the continuation of the financial statements of the legal subsidiary except for
its capital structure, the consolidated financial statements reflect:
(a) the assets and liabilities of the legal subsidiary (the accounting acquirer) recognised and measured at their pre-combination
carrying amounts.
(b) the assets and liabilities of the legal parent (the accounting acquiree) recognised and measured in accordance with this Ind AS.
(c) the retained earnings and other equity balances of the legal subsidiary (accounting acquirer) before the business combination.
(d) the amount recognised as issued equity interests in the consolidated financial statements determined by adding the issued
equity interest of the legal subsidiary (the accounting acquirer) outstanding immediately before the business combination to the
fair value of the legal parent (accounting acquiree).
(e) in a reverse acquisition the non-controlling interest reflects the non-controlling shareholders’ proportionate interest in the
pre-combination carrying amounts of the legal acquiree’s net assets even if the non-controlling interests in other acquisitions are
measured at their fair value at the acquisition date.
In a reverse acquisition, some of the owners of the legal acquiree (the accounting acquirer) might not exchange their equity interests
for equity interests of the legal parent (the accounting acquiree).
Those owners are treated as a non-controlling interest in the consolidated financial statements after the reverse acquisition.
For Earnings per Share for the current period

In calculating the weighted average number of ordinary shares outstanding (the denominator of the earnings per share calculation)
during the period in which the reverse acquisition occurs:
(a) the number of ordinary shares outstanding from the beginning of that period to the acquisition date shall be computed on the
basis of the weighted average number of ordinary shares of the legal acquiree (accounting acquirer) outstanding during the
period multiplied by the exchange ratio established in the merger agreement; and
(b) the number of ordinary shares outstanding from the acquisition date to the end of that period shall be the actual number of
ordinary shares of the legal acquirer (the accounting acquiree) outstanding during that period.
For Earnings per Share for the comparative period

The basic earnings per share for each comparative period before the acquisition date presented in the consolidated financial
statements following a reverse acquisition shall be calculated by dividing:
(a) the profit or loss of the legal acquiree attributable to ordinary shareholders in each of those periods by
(b) the legal acquiree’s historical weighted average number of ordinary shares outstanding multiplied by the exchange ratio
established in the acquisition agreement

122
FINANCIAL REPORTING
Main Disclosures
• General information on the business combination

• Assets acquired and liabilities assumed
• Goodwill or a gain on bargain purchase
• Transactions that are not part of the business combination;
• In which the acquirer holds less than 100 percent of the acquiree;
• Business combinations achieved in stages, i.e., step acquisitions;
• Pro forma information about revenue and profit or loss; and
• Measurement period adjustments and contingent consideration adjustments.
• Revenue and profit or loss of combined entity for current reporting period as though acquisition date for all business
combinations that occurred during the year had been as of beginning of annual reporting period
• Reconciliation of movements in goodwill:
• Opening amounts for gross goodwill and impairment losses
• Additional goodwill recognised in the period
• Adjustments from recognition of deferred tax assets
• Movements in goodwill of a ‘disposal group’ under Ind AS 105
• Impairment losses recognised in the period
• Net exchange differences arising in the period
• Any other changes arising in the period
• Closing amounts for gross goodwill and impairment losses
• Other disclosures as prescribed in the standard
Carve-Out in Ind As 103 From Ifrs 3
As Per IFRS
IFRS 3 requires bargain purchase gain arising on business combination to be recognised in profit or loss as income
Carve-Out
Ind AS 103 requires the bargain purchase gain to be recognised in other comprehensive income and accumulated in equity as
capital reserve
Unless there is no clear evidence for the underlying reason for classification of the business combination as a bargain purchase, in
which case, it shall be recognised directly in equity as capital reserve
Reason for Carve-Out

Bargain purchase gain occurs at the time of acquiring a business
Recognition of such gains in profit or loss would result into recognition of unrealized gains, which may get distributed in the
form of dividends
Such a treatment may lead to structuring through acquisitions, which may not be in the interest of the stakeholders of the
company
Carve-In in Ind As 103 From Ifrs 3
As Per IFRS
IFRS 3 excludes from its scope- business combinations of entities under common control
Carve-In
Appendix C of Ind AS 103, Business Combinations gives guidance on business combinations of entities under
common control
123

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INDIAN ACCOUNTING STANDARD (IND AS) 2

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

Producers of Agricultural produce Minerals and mineral Commodity

Agricultural products Forest products Changes in fair

* NRV- Net Realisable Value

Inventories are assets held

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

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

06 July 2018 The Chartered Accountant Student

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

then Allocated fixed

Costs excluded from the cost of inventories and recognised as expenses

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

The Chartered Accountant Student July 2018 07

When more than one product is produced

The outcome is Main product

When the cost of When the cost of

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

Inventory ordinarily Inventory not ordinarily

Historical Cost Methods Non Historical Cost Methods

It takes into account

Cost is determined by reducing the Labour efficiency

08 July 2018 The Chartered Accountant Student

When finished goods are sold When finished goods are

Raw material is measured Raw material is measured at

Important points of Ind AS 2 to be remembered Disclosure

The Chartered Accountant Student July 2018 09

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

PPE and its Recognition

PPE are tangible items that

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)

Recognition of Initial costs Recognition of Subsequent costs

10 July 2018 The Chartered Accountant Student

Measurement of PPE (or an item of PPE)

Shall be measured at its cost which includes

Directly attributable costs Intitial estimates of the costs of

Is the cost incurred when the

Costs of site preparation

Net cost of testing whether the

Note: Measurement of Cost

The Chartered Accountant Student July 2018 11

Yes Whether exchange No

An item of PPE is measured

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

Measurement after recognition Frequency of revaluation

First time revaluation Subsequent revaluation

Recognise the revaluation Was there a previous Was there a previous

Remaining increase to Remaining decrease to

The Chartered Accountant Student July 2018 13

Factors Legal or similar

When no future economic

Gains shall not be classified

14 July 2018 The Chartered Accountant Student

Are interest Acquisition of a

Borrowing Costs includes

Calculation of Borrowing Cost