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CA FINAL NEW COURSE (May 2022)

GROUP I – PAPER 1
FINANCIAL REPORTING
(Series 1)
Time Allowed: - 3 Hours Maximum Marks: 100

This paper comprises 6 questions. Question No. 1 is compulsory. Attempt

any 4 questions out of the remaining 5 questions.

Marks
1 H Ltd. acquired equity shares of S Ltd., a listed company, in two tranches as 20
mentioned in the below table:

Date Equity stake Remarks

purchased
1st November, 20X6 15% The shares were purchased based on
1st January, 20X7 45% the quoted price on the stock
exchange on the relevant dates.

Both the above-mentioned companies have Rupees as their functional currency.

Consequently, H Ltd. acquired control over S Ltd. on 1st January, 20X7. Following
is the Balance Sheet of S Ltd. as on that date:

Particulars Carrying value Fair value

(₹ in crore) (₹ in crore)
ASSETS:
Non-current assets
(a) Property, plant and equipment 40.0 90.0
(b) Intangible assets 20.0 30.0
(c) Financial assets
- Investments 100.0 350.0
Current assets
(a) Inventories 20.0 20.0
(b) Financial assets
- Trade receivables 20.0 20.0
- Cash held in functional currency 4.0 4.5
Non-current asset held for sale 4.0 4.5
TOTAL ASSETS 208
EQUITY AND LIABILITIES:

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 Equity
(a) Share capital (face value ₹ 100) 12.0 50.4
(b) Other equity 141.0 Not applicable
Non-current liabilities
(a) Financial liabilities
- Borrowings 20.0 20.0
Current liabilities
(a) Financial liabilities
- Trade payables 28.0 28.0
(b) Provision for warranties 3.0 3.0
(c) Current tax liabilities 4.0 4.0
TOTAL EQUITY AND LIABILITIES 208.0

Other information:
Property, plant and equipment in the above Balance Sheet include leasehold
motor vehicles having carrying value of ₹ 1 crore and fair value of ₹ 1.2 crore. The
date of inception of the lease was 1st April, 20X0. On the inception of the lease, S
Ltd. had correctly classified the lease as a finance lease. However, if facts and
circumstances as on 1st April, 20X7 are considered, the lease would be classified as
an operating lease.
Following is the statement of contingent liabilities of S Ltd. as on 1st January,
20X7:

Particulars Fair value Remarks

(₹ in crore)
Law suit filed by a
customer for a claim
of ₹ 2 crore
Income tax demand
of ₹ 7 crore raised
by tax authorities; S
Ltd. has challenged
the demand in the
court.
0.5 It is not probable that an outflow of
resources embodying economic benefits
will be required to settle the claim.
Any amount which would be paid in
respect of law suit will be tax deductible.
2.0 It is not probable that an outflow of
resources embodying economic benefits
will be required to settle the claim.

In relation to the above-mentioned contingent liabilities, S Ltd. has given an

indemnification undertaking to H Ltd. up to a maximum of ₹ 1 crore.
₹ 1 crore represents the acquisition date fair value of the indemnification
undertaking.
Any amount which would be received in respect of the above undertaking shall
not be taxable.
The tax bases of the assets and liabilities of S Ltd. is equal to their respective
carrying values being recognised in its Balance Sheet.

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Carrying value of non-current asset held for sale of ₹ 4 crore represents its fair
value less cost to sell in accordance with the relevant Ind AS.
In consideration of the additional stake purchased by H Ltd. on 1st January, 20X7,
it has issued to the selling shareholders of S Ltd. 1 equity share of H Ltd. for every
2 shares held in S Ltd. Fair value of equity shares of H Ltd. as on 1 st January, 20X7
is ₹ 10,000 per share.
On 1st January, 20X7, H Ltd. has paid ₹ 50 crore in cash to the selling shareholders
of S Ltd. Additionally, on 31st March, 20X9, H Ltd. will pay ₹ 30 crore to the selling
shareholders of S Ltd. if return on equity of S Ltd. for the year ended 31 st March,
20X9 is more than 25% per annum. H Ltd. has estimated the fair value of this
obligation as on 1st January, 20X7 and 31st March, 20X7 as ₹ 22 crore and ₹ 23
crore respectively. The change in fair value of the obligation is attributable to the
change in facts and circumstances after the acquisition date.
Quoted price of equity shares of S Ltd. as on various dates is as follows:
As on November, 20X6 ₹ 350 per share
As on 1st January, 20X7 ₹ 395 per share
As on 31st March, 20X7 ₹ 420 per share
On 31st May, 20X7, H Ltd. learned that certain customer relationships existing as
on 1st January, 20X7, which met the recognition criteria of an intangible asset as
on that date, were not considered during the accounting of business combination
for the year ended 31st March, 20X7. The fair value of such customer relationships
as on 1st January, 20X7 was ₹ 3.5 crore (assume that there are no temporary
differences associated with customer relations; consequently, there is no impact
of income taxes on customer relations).
On 31st May, 20X7 itself, H Ltd. further learned that due to additional customer
relationships being developed during the period 1st January, 20X7 to 31st March,
20X7, the fair value of such customer relationships has increased to ₹ 4 crore as
on 31st March, 20X7.
On 31st December, 20X7, H Ltd. has established that it has obtained all the
information necessary for the accounting of the business combination and that
more information is not obtainable.
H Ltd. and S Ltd. are not related parties and follow Ind AS for financial reporting.
Income tax rate applicable is 30%.
You are required to provide your detailed responses to the following, along with
reasoning and computation notes:
(a) What should be the goodwill or bargain purchase gain to be recognised by H
Ltd. in its financial statements for the year ended 31st March, 20X7. For this
purpose, measure non-controlling interest using proportionate share of the
fair value of the identifiable net assets of S Ltd.
(b) Will the amount of non-controlling interest, goodwill, or bargain purchase
gain so recognised in (a) above change subsequent to 31 st March, 20X7? If
yes, provide relevant journal entries.
(c) What should be the accounting treatment of the contingent consideration as
on 31st March, 20X7?

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2 (a) P Pvt. Ltd. has a number of wholly-owned subsidiaries including S Pvt. Ltd. at 31st 12
March 20X2. P Pvt. Ltd. consolidated balance sheet and the group carrying amount
of S Pvt. Ltd. assets and liabilities (i.e. the amount included in that consolidated
balance sheet in respect of S Pvt. Ltd. assets and liabilities) at 31 st March 20X2 are
as follows:

Particulars Consolidated Group carrying amount of S

(₹ in millions) Pvt. Ltd. asset and liabilities
Ltd. (₹ in millions)
Assets
Non-Current Assets
Goodwill 380 180
Buildings 3,240 1,340
Current Assets
Inventories 140 40
Trade Receivables 1,700 900
Cash 3,100 1000
Total Assets 8,560 3,460
Equities & Liabilities
Equity
Share Capital 1600
Other Equity
Retained Earnings 4,260
Current liabilities
Trade Payables 2,700 900
Total Equity & Liabilities 8,560 900

Prepare consolidated Balance Sheet after disposal as on 31 st March, 20X2 when P

Pvt. Ltd. group sold 100% shares of S Pvt. Ltd. to independent party for ₹ 3,000
millions.

2 (b) Lessee enters into a 10-year lease for 5,000 square metres of office space. The 8
annual lease payments are ₹ 1,00,000 payable at the end of each year. The interest
rate implicit in the lease cannot be readily determined. Lessee’s incremental
borrowing rate at the commencement date is 6% p.a. At the beginning of Year 7,
Lessee and Lessor agree to amend the original lease by extending the contractual
lease term by four years. The annual lease payments are unchanged (i.e., ₹
1,00,000 payable at the end of each year from Year 7 to Year 14). Lessee’s
incremental borrowing rate at the beginning of Year 7 is 7% p.a.
How should the said modification be accounted for?

3 (a) Mr. Niranjan is working for Infotech Ltd. Consider the following particulars: 8

Year 20X0-20X1 Year 20X1-20X2

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 Annual salary ₹ 30,00,000 ₹ 30,00,000
No. of working days during the year 300 days 300 days
Leave allowed 10 days 10 days
Leave taken 7 days 13 days
Leave unutilized carried forward to next 3 days NIL
year

Based on past experience, Infotech Ltd. assumes that Mr. Niranjan will avail the
unutilized leaves of 3 days of 20X0-20X1 in 20X1-20X2.
Infotech Ltd. contends that it will record ₹ 30,00,000 as employee benefits
expense in each of the years 20X0-20X1 and 20X1-20X2, stating that the leaves
will, in any case, be utilized by 20X1-20X2.
Comment on the accounting treatment proposed to be followed by Infotech Ltd.
Also pass journal entries for both the years.

3 (b) On 1st April, 20X1, Makers Ltd. raised a long term loan from foreign investors. The 8
investors subscribed for 6 million Foreign Currency (FCY) loan notes at par. It
incurred incremental issue costs of FCY 2,00,000. Interest of FCY 6,00,000 is
payable annually on 31st March, starting from 31st March, 20X2. The loan is
repayable in FCY on 31st March, 20X7 at a premium and the effective annual
interest rate implicit in the loan is 12%. The appropriate measurement basis for
this loan is amortised cost. Relevant exchange rates are as follows:
 1st April, 20X1 – FCY 1 = ₹ 2.50.
 31st March, 20X2 – FCY 1 = ₹ 2.75.
 Average rate for the year ended 31st Match, 20X2 – FCY 1 = ₹ 2.42. The
functional currency of the group is Indian Rupee.
What would be the appropriate accounting treatment for the foreign currency
loan in the books of Makers Ltd. for the FY 20X1-20X2? Calculate the initial
measurement amount for the loan, finance cost for the year, closing balance and
exchange gain/loss.

3 (c) A holding company [being the entity under consideration] gives a 4

loan/intercorporate deposit to a subsidiary that is recoverable on demand, at a
rate of interest at 10%.
(a) Should such loan be disclosed as a current/non-current asset in the books of
the holding company?
How relevant would the commercial reality of the transaction be in
comparison to the legal terms of the transaction?
(b) How this loan/inter-corporate deposit that is repayable on demand would
be classified in the books of the subsidiary?

4 (a) KK Ltd. has granted an interest free loan of ₹ 10,00,000 to its wholly owned Indian 12
Subsidiary YK Ltd. There is no transaction cost attached to the said loan. The

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 Company has not finalised any terms and conditions including the applicable
interest rates on such loans. The Board of Directors of the Company are evaluating
various options and has requested your firm to provide your views under Ind AS
in following situations:
(i) The Loan given by KK Ltd. to its wholly owned subsidiary YK Ltd. is interest
free and such loan is repayable on demand.
(ii) The said Loan is interest free and will be repayable after 3 years from the
date of granting such loan. The current market rate of interest for similar
loan is 10%. Considering the same, the fair value of the loan at initial
recognition is ₹ 8,10,150.
(iii) The said loan is interest free and will be repaid as and when the YK Ltd. has
funds to repay the Loan amount.
Based on the same, KK Ltd. has requested you to suggest the accounting treatment
of the above loan in the stand-alone financial statements of KK Ltd. and YK Ltd.
and also in the consolidated financial statements of the group. Consider interest
for only one year for the above loan.
Further the Company is also planning to grant interest free loan from YK Ltd. to
KK Ltd. in the subsequent period. What will be the accounting treatment of the
same under applicable Ind AS?

4 (b) A shipping company is required by law to bring all ships into dry dock every five 8
years for a major inspection and overhaul. Overhaul expenditure might at first
sight seem to be a repair to the ships but it is actually a cost incurred in getting the
ship back into a seaworthy condition. As such the costs must be capitalised.
A ship which cost ₹ 20 million with a 20 year life must have major overhaul every
five years. The estimated cost of the overhaul at the five-year point is ₹ 5 million.
The actual overhead costs incurred at the end of year 5 are ₹ 6 million.
Calculate the Carrying Amount at the end of 5th year and Depreciation thereon.

5 (a) Anara Fertilisers Limited issued 2000 share options to its 10 directors for an 10
exercise price of ₹ 100.The directors are required to stay with the company for
next 3 years.
Fair value of the option estimated ₹ 130
Expected number of directors to vest the option 8
During the year 2, there was a crisis in the company and Management decided to
cancel the scheme immediately. It was estimated further as below-
Fair value of option at the time of cancellation was ₹ 90
Market price of the share at the cancellation date was ₹ 99
There was a compensation which was paid to directors and only 9 directors were
currently in employment. At the time of cancellation of such scheme, it was agreed
to pay an amount of ₹ 95 per option to each of 9 directors.
How the cancellation would be recorded?

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5 (b) Nivaan Limited commenced work on two long-term contracts during the financial 10
year ended on 31st March, 2019.
The first contract with A & Co. commences on 1 st June, 2018 and had a total sales
value of ₹ 40 lakh. It was envisaged that the contract would run for two years and
that the total expected costs would be ₹ 32 lakh. On 31st March, 2019, Nivaan
Limited revised its estimate of the total expected cost to ₹ 34 lakh on the basis of
the additional rectification cost of ₹ 2 lakh incurred on the contract during the
current financial year. An independent surveyor has estimated at 31st March, 2019
that the contract is 30% complete. Nivaan Limited has incurred costs up to 31st
March, 2019 of ₹ 16 lakh and has received payments on account of ₹ 13 lakh.
The second contract with B & Co. commenced on 1 st September, 2018 and was for
18 months. The total sales value of contract was ₹ 30 lakh and the total expected
cost is ₹ 24 lakh. Payments on account already received were ₹ 9.50 lakh and total
costs incurred to date were ₹ 8 lakh. Nivaan Limited has insisted on a large
deposit from B & Co. because the companies had not traded together prior to the
contract. The independent surveyor estimated that on 31st March, 2019 the
contract was 20% complete.
The two contracts meet the requirement of Ind AS 115 ‘Revenue from Contracts
with Customers’ to recognize revenue over time as the performance obligations
are satisfied over time.
The company also has several other contracts of between twelve and eighteen
months in duration. Some of these contracts fall into two accounting periods and
were not completed as at 31st March, 2019. In absence of any financial data
relating to the other contracts, you are advised to ignore these other contracts
while preparing the financial statements of the company for the year ended 31 st
March, 2019.
Prepare financial statement extracts for Nivaan Limited in respect of the two
construction contracts for the year ending 31st March, 2019.

6 (a) A freehold property was originally acquired for ₹ 40,00,000. Some years later, 5
after cumulative depreciation of ₹ 11,00,000 has been recognised, an impairment
loss of ₹ 3,50,000 is recognised, taking the carrying amount to ₹ 25,50,000, which
represents the estimated value in use of the property. Shortly thereafter, as a
consequence of a proposed move to new premises, the freehold property is
classified as held for sale. At the time of classification as held for sale, fair value
less costs to sell is assessed at ₹ 25,00,000.
At the next reporting date, the property market has improved and fair value less
costs to sell is reassessed at ₹ 26,50,000.
Six months after that, the property market has continued to improve, and fair
value less costs to sell is now assessed at ₹ 30,00,000.
Subsequently after some time, the property is sold for ₹ 30,00,000.
Determine the relevant accounting treatments as per Ind AS 105.

6 (b) On 31st March, 20X1, XYZ Ltd. makes following estimate of cash flows for one of its 5
asset located in USA:

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 Year Cash flows
20X1-20X2 US$ 80
20X2-20X3 US$ 100
20X3-20X4 US$ 20

Following information has been provided:

Particulars India USA

Applicable discount rate 15% 10%

Exchange rates are as follows:

As on Exchange rate
31st March, 20X1 ₹ 45/US $

As on Expected Exchange rate

31st March, 20X2 ₹ 48/US $
31st March, 20X3 ₹ 51/US $
31st March, 20X4 ₹ 55/US $

Calculate value in use as on 31st March, 20X1.

6 (c) Nikka Limited has obtained a term loan of ₹ 620 lacs for a complete renovation 5
and modernisation of its Factory on 1st April, 20X1. Plant and Machinery was
acquired under the modernisation scheme and installation was completed on 30 th
April, 20X2. An expenditure of ₹ 510 lacs was incurred on installation of Plant and
Machinery, ₹ 54 lacs has been advanced to suppliers for additional assets
(acquired on 25th April, 20X1) which were also installed on 30th April, 20X2 and
the balance loan of ₹ 56 lacs has been used for working capital purposes.
Management of Nikka Limited considers the 12 months period as substantial
period of time to get the asset ready for its intended use.
The company has paid total interest of ₹ 68.20 lacs during financial year 20X1-
20X2 on the above loan. The accountant seeks your advice how to account for the
interest paid in the books of accounts. Will your answer be different, if the whole
process of renovation and modernization gets completed by 28th February, 20X2?

6 (d) K ltd. issued 500,000, 6% convertible debentures @ ₹ 10 each on 01 April 20X1. 5

The debentures are due for redemption on 31 March 20X5 at a premium of 10%,
convertible into equity shares to the extent of 50% and balance to be settled in
cash to the debenture holders. The interest rate on equivalent debentures without
conversion rights was 10%.
You are required to separate the debt and equity components at the time of issue
and show the accounting entries in Company’s books at initial recognition. The
following present values of Re 1 at 6% and at 10% are provided:

Interest rate Year 1 Year 2 Year 3 Year 4

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6% 0.94 0.89 0.84 0.79
10% 0.91 0.83 0.75 0.68

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