CAINTER FOR 47" SESSION REGULAR BATCHES BOOK NO. 67 ACCOUNTING STANDARDS_GR.2_47E_PART 1_13 CHAPTERS INDEX CHAPTER WISE ANALYSIS OF PAST EXAMINATIONS (CA INTER ONLY) AD ‘AS~4 | CONTINGENCIES AND EVENTS OCCURING AFTER BALANCE SHEET DATE 1-16 AS-5 NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN 1-16 [ACCOUNTING POLICIES AS-7 | CONSTRUCTION CONTRACTS: 1-20 AS-9 | REVENUE RECOGNITION 1-18 AS-14 ACCOUNTING FOR AMALGAMATIONS: 1-5 AS -17 | SEGMENT REPORTING 1-20 AS~18 | RELATED PARTY DISCLOSURES 1-16 AS-19 |LEASES 1-26 AS-20 EARNINGS PER SHARE 1-20 AS - 22 | ACCOUNTING FOR TAX ON INCOME 1-21 AS~24 | DISCONTINUING OPERATIONS 1-14 AS-26 [INTANGIBLE ASSETS 1-19 AS-29 | PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS 1-22 COMPREHENSIVE PROBLEMS ON ACCOUNTING STANDARDS - GR2 WIL Bt RELEASED MASTER MINDS COMMERCE INSTITUTE PYT. LTD. Ass LiLo ta Rael bch edith ea. hed [GUNTUR { RAJREATUMORY [ HUBNOOL { VIZAG | NELLORE eeroeana | Vipannos | aeuacet Cell: 98851 25025 / 26 Visit us @ www.mastermindsindia.com Mail: mastermindsinfo@ymail.com Facebook Page: MASTERMINDS For CA You tube Channel: MASTERMINDS FOR CABCMA Android App: Masterminds online classes | iOS App: Classplus (Organisation code is MZGUN) ISSUE DATE: 23-03-2022 MRP: RS.700ACCOUNTING STANDARDS — GR.2 CHAPTER WISE ANALYSIS OF PAST EXAMINATIONS (CA INTER ONLY) ‘AS-4 (CONTINGENCIES AND EVENTS 5 OCCURRING AFTER THE BALANCE SHEET DATE) AS-5 (NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ssf -fefal-]ef-f-l-fa}-fef-fef- ACCOUNTING POLICIES) ‘AS-T (CONSTRUCTION CONTRACTS) “i sf-fefelstefefeisp-) ef fafef- ‘AS-9 [REVENUE RECOGNITION) -|-}-]-fsl-fsf-]-|-f-]-]-]-fo] AS-14 (AMALGAMATION) -|-]-/s]-]-]-]-]-]-[s]-]-/-]-]s AS-17 (SEGMENT REPORTING} 5/-]-|-]-|-Js]-]5/-[s]-]-]-]-]- AS-18 (RELATED PARTY DISCLOSURES} -{s]-]s}-]-]-]-]-]-]-]s]-]-]- AS-19 {LEASES} -/s]-|-]-/s]s]-]-|-]-|s]-]-]-]s ‘AS-20 {EARNING PER SHARE) -i5f-fsf-f-f-fa}-fef-|-f-f-f-}s as. accountincFortaxeson come) |-|5]-]-[5/-|-|5]-|5]-|s]-|s]-|- AS -24 (DISCONTINUING OPERATIONS) elefsfefe lee yep lepe]efsy-f ef. AS-26 (INTANGIBLE ASSETS) s}-]-]-|-|s]-]s|/s]-|s]-]-]-/5 ‘AS-20 (PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS) GUIDANCE NOTES’ SCHEDULE 3 -[-[sf-]-|-[s | REMQMED FROMTHE} | COMPREHENSIVE PROBLEMS ON ACCOUNTING. STANDARDS - GR.2 AlDead gu WWW.MASTERMINDSINDI COM | 98851 25025 / 26 LEARNING OBJECTIVES 1) Purpose of AS-4 2) Scope & Applicability 3), Definition of Event Occurring after Balance sheet 4) Adjusting Events: Meaning &Accounting Trealment 5) Non - Adjusting Events- Meaning &Accounting Treatment 6) Exceptions to above rules 7) Contingencies (Other than those covered by AS-28) ANALYSIS OF PAST EXAM PAPERS OF IPCC AND GAINTER i i ae aa ee 4) | THEORY QUESTIONS : : : : : : : : 2) | APPLICATION ORIENTED QUESTIONS - : : : om SM. 3)_] TRUE OR FALSE STATEMENTS: : & : : : : ESSOGT SUPT EDETION:!: a SEMAINE: ILLUSTRATION 4 en M1B-RTP ILLUSTRATION 2 CRD? M18-MITP1-S10 cRD4 ILLUSTRATION 3 RDG M18-MITP2-S10 ASSIGN 4 TLUSTRATIONS cao Pan cot TLUSTRATION aot rr cans TLuSTRATONT ior Wa oe EXAMPLE CRD S MI9-MITP 1-40 ASSIGN 1 PRACTICAL QUESTION 15. RDS M19-MTP2-5h1 ASSIGN 4 WERT TEN WRT nS? TOME cas N20-RTP ACSP4 N20-MTP-5M CRD M21-RTP ASSIGN 2 JUL 21-5 ASSIGN 9 N24-RTP CRD N24-NITP1-SM cas N24-MITP2-SM ACSP 5. CAINTER | ACCOUNTING STANDARDS | GR2 | 47E 1Pioneer Fon Mec /cec Toca/cwarivat PPR CHAPTER OVERVIEW THEORY FOR CLASSROOM DISCUSSION 1 2 [ANALYTICAL QUESTIONS FOR CLASSROOM DISCUSSION {CRD} 3 [ASSIGNMENT PROBLEMS [ASSIGN] 4 5 THEORY QUESTIONS (TQ) [ADDITIONAL CONCEPTS FOR SELF PRACTICE (ACSP) 68 THEORY FOR SELF STUDY DIVISION 1: THEORY FOR CLASSROOM DISCUSSION 1) PURPOSE OF AS -4: a) One of the important qualitative characteristics of a Financial Statements is “completeness” of information that is provides. b) The Primary Objective of the stancard is to ensure the completeness, that all the transactions & related information should be updated in financial statements ¢) Thus, AS 4 deals with the treatment and disclosure requirements in the financial statements of events occurring after the balance sheet, 2) SCOPE AND APPLICABILITY: Applicable to all3h Even though the standards name starts witir“Comtingénbes” the provisions of this standard to the extent it deals with treatment of "contingences: Stands withdrawn we f 01.04.2004. The same is to be deait with as per AS-29 "Provisions, contingeftt abilities& contingent assets’ w.ef 01.04.2004. However, AS- 29 does not deal with all types of coniigenct AS.29 defines provisions as liabilities which can be measured only by using a substantial degree of estimation. It further provides that the term ‘Provision’ is also used in the context of items such as depreciation, impairment of assets and are not addressed in the standard. In view of this, impairment of assets and doubtful debts are not covered by AS 28. It may be noted that the paragraphs of AS 4 dealing with contingencies also cover provision for contingent loss in case of impairment of assets, not covered by other Accounting Standards, such as AS 2: Valuation of Inventories, AS 13: Accounting for Investments and AS 26: Impairment of Assets. Accordingly, AS-4 deals with impairment of certain assets, for example, the impairment of financial assets like receivables (Commonly referred to as Provision for Doubtful Debts) CONCEPT QUESTION 1iCRDI: Identify whether the following items are covered by AS 4 or not. a} Provision for doubtful debts b) Provision for diminution in the value of Investments. 3) DEFINITION: Events occurring after balance sheet date refers to those significant events both favourable & unfavourable, that occur between the Balance Sheet date and the date on which Financial Statements are approved by the Board of Directors in case of a company, and by the ‘corresponding aoproving authority in the case of any other entity. EXAMPLE: For the year ending on 31" March 2020, Financial Statement 's finalized and approved by the Board of the directors of the company in its meeting held on 05" August 2020, In this case the events taking place between 01*! April 2020 and 05" August 2020 are termed as events cocurting after the Balance Sheet cate. 'AS~4 | CONTINGENCIES AND EVENTS OCCURING AFTER BALANCE SHEET DATE | 47E | MAIN MATERIAL 2DL LAL WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 01.04.18 31.08.20 05.08.20 significant events Date of approval of financial statements Beginning of Balance the year Sheet date ty BOD Events occurring after balance sheet date CONCEPT QUESTION 2 {CRD}: Year beginning 01.04.20, Date of approval of Financial Statements by Board of Directors 21.05.20; Date of AGM 31.08.20; Let us say, a significant event occurred on 01.07.20. Is this an event occurring after Balance Sheet or not? ‘Will your answer change If event date s 01.05.207 Events occuring after the Balance sheet date ‘Adjusting events Non-Adjusting events 4) ADJUSTING EVENTS: MEANING: a) b) 1) Conditions should exist on balance shiset date ii) Events occurring after balance sheet date provide further (or) additional information about conditions existing on balance sheet date ili) The additional information matenally affects the amounts on balance sheet date Example: Loss on a trade receivable account which is confirmed by the insolvency of a customer which ‘occurs affer the balance sheet date ACCOUNTING TREATMENT: a) Assets &liabilities at Balance sheet date should be adjusted b) Suitable cisclosure for above in financial statements is required GONCEPT QUESTION 3iCRD): Identify whether the Following event is to be adjusted or not. a} ALLtd, sold a major property which was included in the balance sheet at & 1,00,000 and for which contracts had been ‘exchanged on 15% March 2021. The sale was completed on 15 May 2021 at a price of & 2,50,000. b} The company has entered into a sale agreement on 20 March 2020 to sella property for a consideration of R.7,50,000 \which is being carried in the books at R5.5,50,000 atthe year end. The transfer of risk andreward and sale is complete in the month of May 2020 when conveyance and possession get completed, (M21-TPI-5M) 5) NON-ADJUSTING EVENTS: MEANING: Those events which are incicative of conditions that arose subsequent to Balance sheet ‘ale. We can call these events as non- adjusting events. CAINTER | ACCOUNTING STANDARDS | GR2 | 47E 3Pioneer Fon Mec /cec Toca/cwarivat PPR a) Ifevent does not relate to concitions existing al balance sheet date (or) b) Ifevent does not atfect the figures stated in financial statements Example: Mergers or Acquisition, Investment or Reconstruction, Issue of Shares or Debentures, Purchase or Sale of Fixed Assets, Changes in Exchange Rates etc after balance sheet date. ACCOUNTING TREATMENT: a) Balance sheet figures need not be acjusted b) Ievent {or} the'r effects are significant, cisclosure can be made in the report of approving authorities. The disclosure in the (BOD) report should contain’ i) Nature of the event & ii) Estimation of the financial effect (or} if itis not possible to estimate, disclose the fact that such estimation cannot be made, CONCEPT QUESTION 4(CRDI: Can we disclose non-adjusting events in Financial Statements? CONCEPT QUESTION 5{CRDE: F Ltd. has finalized their financial statements for the year ending 31st March 2020 and ‘approved by their approving authority on 20th June 2020. a} On 15th May 2020, one of the manufacturing units was closed resulting shutdown cost of R25 lakhs. ) On 30th April 2020, a 100% subsidiary of F Lid, declared dividend of Rs, 1D lakhs for the year ended 3st March 2020, 6) Foreign xchange loss curing the period between at Apri 2829 and tt June 2020 resale into reduction of vale of assets by RS, 30 lakhs. 4) FLtd. has an inventory of 50 stitching machines costs at €5,500,per machine as on 31 March 2020. On 34 March 2020 the company is expecting a heavy dectine in the deriénd in next year. The inventories are valued at cost or net realizable value, whichever is lower. During the month of to fallin demand, te prices have gone down drastically. The company has sold 5 machines during this: month ata price of €4,000 per machine. ) The company has received, during the 1a government grant of Rs.15 lakhs for purchase of a machine. The company has received a notice for refundl:of the said grant on 15 June 2020 due to violation of some of the ‘conditions of grant during the year 2019-2070 6) EXCEPTIONS TO THE ABOVE RULES: Even though an event is a nen-adjusting event, it should be adjusted: a) If it affects going coneem assumption of entity (Then, such event should be adjusted & it should prepare financial statements on NRV/ liquidation basis) (or) b) Ifitis required by Statute (Law) EVENTS INDICATING GOING CONCERN ASSUMPTION INAPPROPRIATE: Events occurting after the balance sheel cate may indicale (nat the enlerprise ceases 10 be a going concern. A deterioration in operating resuits and financial position, or unusual changes affecting the existence or substratum of the enterprise after the balance sheel cate (e.g., destruction of a major production plant by a ‘ire after the balance shee! date) may indicate a need to consider whether it is proper to use the fundamental ‘accounting assumption of geing concern in the preparation of the financial statements. In case the gong ‘soneem, assumption is not valid (based on events occurring after the balance sheet date), the financial statements are prepared on a liquidation basis. DIVIDEND DECLARED AFTER BALANCE SHEET DATE: There are events which, although take place after the balance sheet date, are sometimes reflected in the financial statements because of statutory requirements or because of their special nature. For example, if dividends are declared after the balance sheet date but before the financial statements are approved, the dividends are not recognised as a liability at the valance sheet date because no obligation exists at that time unless a statute requires otherwise, Such dividends are disclosed in the notes. 'AS~4 | CONTINGENCIES AND EVENTS OCCURING AFTER BALANCE SHEET DATE | 47E | MAIN MATERIAL 4DL LAL WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 ‘Thus, no liability for proposed dividends needs to be recognised in financial statements for financial year ended Sst March 2017 and subsequent years. Such proposed dividends are to be disclosed in the notes as per Companies (Accounting Standards) Amendment Rules, 2016 issued on 20 March 2076 ‘SUMMARY OF THE ABOVE PRINCIPLES Events occuring after Between Balance sheet date & Date of approval of Financial statements | | Contition existing on | Condition not existing on | ‘After Approval of financial statements Balance sheet date Balance sheet date {Going concer Is not {Going concem is ‘esting evn “afected tected ‘Adjusting event (.e., Prepare financial statements on Liquidation FNRY Basis), | Not an event as per AS 4 | Non-Adjusting event 7) CONTINGENCIES: Cont ngency is a condition or a situation, the ultimate outcome of which gain, or loss will be known or determined cniy on the occurance or non-oocurance of one or more fuure uncerlain events, Contingencies (Other than covered by AS - 29) Rolating to condition (or situation Existing at the balance sheet date| | Arising after balance shest date No accounting treatment is required, nethorby way of provision norby giving accounting notes Expected outcome Contingent Loss oasis razon 7 If Loss is probable, it If Expected Loss is Prowon snoutte | | BewRBlesoeue a ates made byway of note ignored Contingent Gain Covered by AS-28 (w.201-04.2004) CAINTER | ACCOUNTING STANDARDS | GR2 | 47E 5PIONEER FOR MEC / CEC TO CA/ CMA FINAL Conn DIVISION 2: ANALYTICAL QUESTIONS FOR CLASSROOM DISCUSSION [CRD] RD 1: While preparing its final accounts for the year ended 31% March 2017 a company made a provision Tor bad debts @ 8% of ils total trade receivables. In the last week of February 2017, a trade receivable for Rs. 2 lakhs had suffered heavy loss due to an earthquake: the loss was not covered by any insurance policy. In Apri 2017 the trade receivable became bankrupt. Can the company provide for the full oss arising out of insolvency of the trade receivable in tne final accounts for the year ended 31% March 2017? SSM-ILLUSTRATION 6-100% eee PAC anSWRE: | Loss of RS.2L to ho Provided SOLUTION: GIVEN FACTS: A Debtor of Rs.2 lakhs, who had suffered heavy loss due to an earthquake in jast week of February 2017, became insolvent in the month of April 2017. APPLICABLE AS & PRINCIPLE: As per Accounting Standard 4 - "Contingencies & Events occurring after Balance Sheot date”, Assets and Liabilities should be adjusted for “Events occurring after the Balance Sheet date” that provide additional evidence of amounts relating to conditions existing at the Balance Sheet date, Events occurring afler Balance Sheet dale refers to these significant events, both favourable & unfavourable, that occur between balance sheet date and date of approval of financial statements by approving authority ANALYSIS: In the given case. question is silent aboul gate of approval of financial statements by approving authority. Hence, itis assumed that financial stateménts are not yet approved by approving authority (ie, Board of Directors) and henes, itis an event ocourfind aller Balance Sheet date, Debtor suffering Heavy Loss due to earthquake! in Febctiary is a condition existing at the balance sheet date. In the month of Apri, he became insolvent, his it provides additional evidence relating to condition existing al balance sheet date and hence, itis an adjusting svent as per AS - 4 So full provision for bad debt amounting to Rs. 2 lakhs should be made to cover the loss arising due to the insolvency in the Final Accounts for the year ended 31* March 2017. The fact that the Company has already made a general provision for bad debts at 5% of its total debtors is irrelevant in this context. Had the earthquake taken place after 21* March 2017, then mere: have been sufficient, closure required as per AS - 4, would CONCLUSION: Yes, the company can provide for full loss arising out of insolvency of deblor for the year ended 31% March 2017 because it is an adjusting event as per AS - 4 CRD 2: During the year 2015-2076, Raj Lid, was sued by a competitor for Rs. 15 Lakhs for infringement of a trademark. Based on the advice of the company's legal counsel, Raj Lic. provided for a sum of Rs. 10 lakhs in its financial statemients for the year ended 31% March 2016. On 18” May 2016, the Court decided in favour of the party alleging infringement of the trademark and ordered Raj Lid. to pay the aggrieved party a sum of Rs. 14 lakhs. The financial statements were prepared by the company's management on 80" April 206 and approved by the board on 30" May 2016. You are required to suggest now to deal with this. ‘SM-ILLUSTRATION 7-100% [ENAL ANSWER Provision Amount to Be Increased By RS.4L_ 'AS~4 | CONTINGENCIES AND EVENTS OCCURING AFTER BALANCE SHEET DATE | 47E | MAIN MATERIAL 6Dead SOLUTION: GIVEN FACTS: A Competitor filed suit agzinst Raj Ltd for Rs.15 lakhs during 2015-16 for infringement of trademark based on legal advice, Raj Ltd created provision for Rs.10lakhs .On 18" May, Court ordered Raj ltd to pay Rs.14 lakhs sur APPLICABLE AS & PRINCIPLE: As per Accounting Standard 4 - “Contingencies & Events occurring after Balance sheet date”, Assets and Liabilities sould be adjusted for “Events occurring affer the Balance Sheet Date" thal provide additional evidence of amounts relating to conditions existing al the Balance Sheet date. Events occurring after balance sheet date refers to those significant events, Both Favourable & Untavourable, that occur between Balance Sheet dale and date of aporoval of Financial Statements by approving authority. ANALYSIS: In the given case, date of aporoval of Financial Statements by approving authority is 30" May.2016.0n 18” May, Court ordered Raj ltd to pay 14 lakhs sum which is affer balance sheet date anc before approval of financial statements and hence it is an event occurring after balance sheet date Raj Ltd. was sued by a competitor for infringement of a trademark duting the year 2015-16 for which the provision was also made by it, represents a condition existing at Balance sheet date. The decision of the Court on 18" May, 2016, for payment of the penalty provides additional evidence relating to condition existing at balance sheet date and hence, it is an adjusting event as per AS - 4 WWW.MASTERMINDSINDI COM | 98851 25025 / 26 Therefore, Raj Ltd. should adjust the provision upward by Rs. 4 lakhs ‘0 reflect the award decreed by the Court to be paid by them to its competitor. Had the judgment of the Court been delivered on 1% June 2016, it would be considered as an event occurring after the approval of the financial statements which is not covered by AS 4 (Revised). In thal case, no adjustment in the Financial Statements of 2075-16 would have been required & CONCLUSION: Raj Ltd should adjust the provision Adjusting event as per AS-4 us Wd.byRs. 4 lakhs as the given case represents an ERD 3: A Limited Company closed its acoguitifig year on 30.08.2020 and the accounts for that period were considered! and approved by ihe board of-direciors"on 20"" August 2020. The company was engaged in laying pipe line for an cil company deep beneath’ tre earth. While doing the boring work on 01.09.2020 it had met a rocky surface for which it was estimated that there would be an extra cost to the tune of Rs.780 lakhs, You are required to state with reasons, how the event would be dealt with in the financial statements, for the year ended 30.08.2020, WHAT WOULD BE THE IMPACT ON THE QUESTION? ]a)_IF COMPANY HAD MET ROCKY SURFACE ON 01/08/2020. ‘SMAILLUSTRATION 5.100% Not an event occurring after balance sheet date SOLUTION: GIVEN FACTS: On 01.09.2020, it had met @ rocky surface due to which it is estimated to have extra cost of Rs,780 lakhs. Itis assumed during the year itself, company agreed for laying pipeline for an Oil Company. APPLICABLE AS & PRINCIPLE: As per Accounting Standard 4 Contingencies & Events occurring after Balance sheet date’, Assets and Liabilities should be adjusted for “Events occurring after the balance sheet date” that provide additional evidence of amouints relating to conditions existing at the balance sheet date. Events occurring after balance sheet date refers to those significant events, both favourable & unfavourable, that occur between balance sheet date and date of approval of financial statements by approving authortty CAINTER | ACCOUNTING STANDARDS | GR2 | 47E ?Pioneer Fon Mec /cec Toca/cwarivat PPR ANALYSIS: In this case the event ic., finding rocky surface, which was expected 1o push up cost, became evident after the date of approval of the accounts, So, itis not an “Event occurring afer the balance sheet date” Itis not covered by AS - 4. However, this may be mentioned in the Report of Approving Authority. SONCLUSIOT 1¢ given case does rol salisty the definition of an “event occurring afler balance sheel date". CRD 4; The Board of Directors of M/s. New Graphics Ltd. in its Board Meeting held on 18 April, 2020, considered and approved the Audited Financial results along with Auditors Report for the Financial Year ended 31* March, 2020 and recommended a divicend of Rs. 2 per equity share (on 2 Crore fully paid-up equity shares of Rs. 10 each) for the year ended 31%! March, 2020 and if approved by the members af the forthceming Annual General Meeting of the company on 18" June, 2020, the same will be paid to ail the eligible shareholders. Discuss on the accounting treatment and presentation of the said proposed dividend in the annual accounts of the company for the year ended 31% March, 2020 as per the applicable Accounting Standard and other Statutory Requirement 4 x SOLUTION: APPLICABLE STANDARD & PRINCIPLE: As per AS 4 "Contingencies and Events Occurring after the Balance Sheet Date’, states that adjustments to assets and liablities are not appropriate for events occurring after the balance sheet date, if such events donot relate to conditions existing at the balance sheet dae, \.e., Assets & Liabillies need not be adjusted.in case of Non-Adjusiing Events. However, as per the amendment in AS 4 "Contingeficies and: Events Occurring Alter the Balance Sheet Date’ vide Companies (Accounting Standards) Améndinents Rules, 2016 dated 30" March, 2016, the events which take place atter the balance sheet date, ate sometimiés reflected in the financial statements because of statutory requirements or because of theit special natare. ANALYSIS: Dividend's declared after thé-bialanns:Sheet dale but before approval of financial statements are not recognized as a liability at the balance shéet date because no statutory obligation exists at that time. As per Schedule Ill, Proposed Dividend should se disclosed separately in the Noles to Accounts. Hence such dividends are disclosed in the notes to financial statements No provision is required to be made. Such proposed dividends are to be disclosed in the notes to financial statements. Accordingly, the dividend of €4 crores recommended by New Graohics Ld in its Board meeting ‘on 18" April 2020 shall not be accounted for in the books for the year 2019-20 irrespective of the fact that it pertains to the year 2019-20 and will be paid after approval in the Annual General Meeting of the members / shareholders. CONCLUSION: Procosed dividend is not tc be recognised in the books of accounts, only it can be disclosed in the notes to financial statements. MIB-ITPT-Stl-100%, NIBTPT-SH-100%, M19-RTP-100% 'No Need fo Recognise, Just Disclose in Notes to Accounts RD 5: A Company follows April - March 2s its Financial Year The company recognises checues dated 31° March or before, received from customers afler balance sheet date but before approval of financial statement by debiting Cheques in hand Aic and crediting the Debtors A/c. The Cheque in hand is shown in balance sheet as an item of cash and cash equivalents, All Cheques in hand are presented to bank in the month of Apnl anc are also realised in the same month in normal course after deposit in the bank, Stale wilh reasons whether collection of cheques beering date 31 March or before, but received after balance sheet date is en Adjusting event and now this fact is to be disclosed by the company? TEREEEE c=] WHAT WOULD BE THE IMPACT ON THE QUESTION? it ja} IF CHEQUES ARE COLLECTED BY THE MARKETING PERSONNEL OF THE COMPANY ON OR BEFORE 318° WARCH AND PRESENTED TO BANK AND REALISED IN THE NONTH OF APRIL. 'AS~4 | CONTINGENCIES AND EVENTS OCCURING AFTER BALANCE SHEET DATE | 47E | MAIN MATERIAL 8Dead Not an Adjusting event eer SOLUTION: APPLICABLE AS & PRINCIPLE: As per Accounting Slandard 4 - “Contingencies & Events occurring after Balance sheet date", Assets and should be adjusted for “Events occurring after the Balance Sheet date” thal provide additional evidence of amounts relating te conditions existing at the balance sheet date, Events occurring after balance sheet date refers to those significant events, both favourable & unfavourable, that oocur between balance sheet date and date of aporoval of financial statements by approving authority. ANALYSIS: Even if the cheques bear the date 31% March or before, the cheques received atler 31"! March do not represent any condition existing on 34% March. Thus, the collection of checues after balance sheet date |s not an adjusting event, Recognition of cheques in hand is therefore not consistent with requirements of AS 4 (Revised). Moreover, the collection of cheques after balance sheet date does nct represent any material change or commitments affecting financial position cf the enterprise, and so ne disclosure of such collections in the Directors’ Report is necessary. It should also be noted that, the Framework for Preparation anc Presentation of Financial Statement defines assets as resources controlled by an enterprise as a result of past events from whicn economic benefits are expected to flow to the enterprise Since the company acquires custody of the cheques after 31° March, it does not have any control over the cheques on 31* March and hence cheques in hand do not qualify to be recognised as asset on 315 March. CONCLUSION: Collection of cheques bearing date $1 March or before but received after balance sheet is not an adjusting event, s 3109 2020. The chances o! recovery by way of oa Suit Are not good as per legal opinion given by the Counsel in Aptil 2020. Can the company provi for fuk amount of Rs. 16 lakhs as provision for doubiful debis? Discuss RE SMALLUSTRATION 3-100% (EUG ANSWERS! Yes [RBCS ATEGURISATION: SOLUTION: GIVEN FACTS: During the year, company has filed legel suit against debtor for recovery of Rs.15 lakh. In April, 2020 company has received legal opinion which stated that chances of recovery are not good. As per AS 4 (Revised) ‘Contingencies and Events Occurnng Aller the Balance Sheet Dale, assels and labililies should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing al the balance sheet date. ANALYSIS: In the given case, company should make the provision for coubtful debts, as legal suit has been filed on 37 March, 2020 and the chances of recovery from tne suit re not good. Though, the actual result of legal suit will be Known in future yet situation of non-recovery from the debtors exists before finalization of financial statements. Therefore, provision for doubtful debis should be made for the year ended on 31% March 2020, CONCLUSION: Yes, the company can create provision for doubtful debts of Rs.15 lakhs GRD 7: An earthquake destroyed a mejor warehouse of ACO Ltd. on 20.05.2020. The accounting year of the company ended on 21 03.2020. The accounts were approved on 30.06.2020. The loss from earthauake is estimated at Rs.3¢ lakhs. State with reasons, whether the loss due to earthquake is an adjusting or non- adjusting event and how the fact of loss is to be disclosed by the company. CAINTER | ACCOUNTING STANDARDS | GR2 | 47E 8Pioneer Fon Mec /cec Toca/cwarivat PPR ‘SMHILLUSTRATION 2-100% Non-Adjusting Event ji a SOLUTION: APPLICABLE STANDARD & PRINCIPLE: As per AS 4 'Conlingencies and Events Occurring after the Balance Sheet Date’, states that adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet date, f such events do not relate to conditions existing al the balance sheet date. .e., Assets & Liabilities need not be adjusted in case of Non-Adjusting Events. Events occurring after balance sheet date refers to those Significant Events, both favourable & unfavourable, that occur behueen balance sheat date and date of approval of Financial Statements by approving authority. ANALYSIS: In the given case, earthquake occurred on 20.05.2020 which is after balance sheet and before approval of financial statements i.e., on 30.06.2020. Hence. itis an event occurring ater balance sheet date. The destruction of warehouse due to earthquake did not exist on the salance sheet date i.e, 31.03.2020. Even there is no condition exisiing at Balance sheet dale. Therefore, loss occurred due to earthquake is not to be recognised in the financial year 2019-2020, However, according to the standard, unusual changes affecting the existence or substratum of the enterprise after the balance sheet date may indicate a need fo consider the use of funcamental accounting assumption of going concemn in the preparation of the financial statements. As per the information given in the question, the earthquake has caused destruction of major warehouse, therefore fundamental accounting assumption of going concern is called upon. ‘Assuming that the going concer, assumption is still valid, the fact of earthquake together with an estimated loss of RS. 30 lakhs should be disclosed in the finarigial statetiénts for the financial year 2019-2020. CONCLUSION: Destruction of major warchousé by earthavake, in ihe given case, is @ Non-Adjusiing Event &hence loss need not be recognised, heweypras the amount is material, disclosure is required. CRD 8; The accounting year of Dee Limited endéd'on 31% March, 2020 but the accounts were agproved on 30" April, 2020. On 15! April, 2020 a fire occurred in the factory and office premises. The loss by fire is of such a magnitude that it was not possible to expect the enterprise Dee Limited to start operation again. State with reasons, whether the loss due to fre is en adjusting or non- adjusting event and how the fact of loss is to be disclosed by the company in the context of the provisions of AS - 4 (Revised) REE a N48-5M-100% Adjusting Event A SOLUTION: APPLICABLE STANDARD & PRINCIPLE: As per AS 4 (Revised) "Contingencies and Events occurring after the Balance Sheet Dale’, an event occurring after the balance sheet date shauld be an adjusting event even if il does not reflect any condilion existing on the balance sheet date, if the event is such as 10 indicate that the fundamental accounting assumption of going concer is no longer appropriate. ANALYSIS: The fire occurred in the Factory and Office Premises of an enterprise after 31% March, 2020 but Detore aporoval of Financial Statement of 30.04.2020. The loss by fire is of such a magnitude that it is not reasonable to expect the Dee Ltd. to start operations agzin, i, the going concem assumption is not valie Since the fire occurred after 31.03.2020, the loss on fire is not a result of any condition existing on 31.03.2020. But the loss due to fire is an adjusting event the entire accounts need to be prepared on a liquidation basis with adequate disclosures oy the company by way of note in its financial statements in the following manner. 'AS~4 | CONTINGENCIES AND EVENTS OCCURING AFTER BALANCE SHEET DATE | 47E | MAIN MATERIAL 10Dead WWW. MASTERMINDSINDI COM | 98851 25025 / 26 Major fire occured in the factory and office prerrises on 15% April 2020 which has made impossiole for the enterprise to start operations again. Therefore, the Financial Statements nave been prepared on Liquidation oasis. gu CONCLUSION: Yes, Loss due io fire in the given case is an adjusting event and financial statements are to be prepared on Liquidation basis. CRD 9: The financial statements of PQ Lid, for the Year 2018-20 approved by the Board of Directors on 418" July, 2020. The following information was provided a) A suit against the company's advertisement was tiled by a party on 20" April, 2020, claiming damages of Rs. 25 lakhs, b) The terms and conditions for acquisition of business of another company have been decided by March, 2020. But the financial resources were arranged in April, 2020 and amount invested was Rs. 50 lakns. Would your answer change if by 37°! March 2020 only negotiations were completed, and terms anc conditions were not finalised? ¢) Theft of cash of Rs. 5 lakhs by the cashier on 51" March, 2020 But was detected on 16% July, 2020.Would your answer change if it was detected on 14* July, 2020, d) Company sends a proposal to sell an immovable property for Rs. 40 lakhs in March, 2020. The book value of the property is Rs. 30 lakhs on 31% March, 2020. However, the deed was registered on 15°" April, 2020 @) Amajor fre has damaged the assets in a factory on 5" April, 2020. However, Ine assets are fully insured. f) On 2nd April 2020, a fire completely destroyed a manufacturing plant of the entity, Il was expected that the loss of Rs.10 million would be fully covered by the insurance company. 4) A claim for damage amounting to Rs.8 milion for bed of patent had been received by the entity prior to the year-end. Itis the director's opinion, backes by fegal advice that the claim will ultimately prove to be baseless. But itis stil estimated that it would iavolve.a considerable expenditure on legal fees. With reference to AS - 4 “Contingencies and events occuitting atter the balance sheet date", State whether the above-mentioned events will be treated ‘9s ‘contagencies, adjusting events or non-adjusting events occurring after the balance sheet date. W19-5M-100% , M20-MTPY-5M-100% , NZ0-MTP-5U-100%, N21= RTP.100%h , SM PRACTICAL QUESTION 15-100% a) Suit fled against the company is a contingent liabilty, but it was not existing as on balance sheet date as the suit was filed on 20” April after the balance Sheet date, As ger AS 4, ‘Contingencies’ used in the Standard is restricted to conditions or situations at the balance sheet date, the financial effect of whieh is to be determined oy future events which may or may notaccur. Hence, itwill have no effect on financial statements and will be a non-agjusting event b) Inthe given case, terms, and conditions for aoquisition of business were finalized and carried out before the closure of the books of accounts but transaction for payment of financial resources was effected in April 2020. This is clearly an event occuring after the balance sheet date. Hence, necessary adjustment te assets and liabilities for acquisition of business is necessary in the financial statements for the year ended 31° March 2020, If by 81% March 2020, only negotiations were completed, ft becomes a non-adjusting event because negotiation cannot be considered as a proper evidence/condition. €) Only those significant events which occur between the balance sheet date and the cate on which the financial statements are approved, may indicate the need for adjustment to assels and liabiliies existing ‘on the balance sheel date or may require disclosure. In the given case, thefl of cash was detected on 16” July 2020 after approval of financial siatements by the Board of Directors, hence no treatment is required. If theft of cash was detected on 14" July 2020, then it becomes an adjusting event CAINTER | ACCOUNTING STANDARDS | GR2 | 47E FryPioneer Fon Mec /cec Toca/cwarivat PPR d) Adjustments to assets and liabilities are nol appropriate for events ocourting after the balance sheet date, if such events do not relate to conditions existing al the balance sheet date. In the given case, sale of immovable properly was under proposal stage (negotiations also nol started) on the balance sheet date. Therefore, no adjustment to assets for sale of immovable property is required in the financial statements for the year ended 31* March 2020, @) The condition of fre occurrence was not existing on the balance sheet date. Only the disclosure regarding event of fire and loss being completely insurec maybe given in the report of approving authority. f} Theeventis a non-adjusting even! since il occurred after the year-end and does nal relate to the conditions ‘existing at the year-end, However, itis necessary to consider the validity of the going concem assumption having regard to the extent of insurance cover. Also, since itis said that the loss would be fully recovered by the insuranoe company, the fact should be disclosed by way of a note lo Ihe financial stalemenis, 4g} On the basis of evidence provided, the claim against the company will not succeed. Thus, Rs.8 milion should not be provided in the account but should be disclosed by means of a contingent liability with full details of the facts. Provision should be made for legal fee expected to be incurred to the extent that they are not expected to be recovered, DIVISION 3: ASSIGNMENT QUESTIONS [ASSIGHI ASSIGN 1: While preparing its final accounts for the year ended 31* March, 2020, 2 company made provision for bad debts @ 5% of its total debtors. In the last week of February, 2020, a debtor for Rs. 20 lakhs had suffered heavy loss due to an earthquake, the loss was not covered by any insurance policy. In April, 2020 the debtor became a bankrupt. Gan the company: provide for the full loss arising out of insolvency of the debtor in the final accounts for the year ended 31: N18-RTP-100%, M1-MTP2-5M-100%, weNTPr SHAG, Mi. MTP2-5M-1098%: A ASSIGN 2: A case is gcing on between ABU Ltd:arid Tax department on claiming the exemption for certain ‘goods, for the year 2016-2017. The court has issued the order on “Sth April and rejected the claim of the ‘company. Accordingly, company is liable to pay the additional tax. The financial statements were approved on 3tst May 2077. Shall company account for such tax in the year 2016-2017 or shall it account for in the year 2017-2018? M21-RTP-100% To be Accounted in FY 16-47 e A ASSIGN 3: Setupat Ld had taken a large-sized civil construction contract, for a Public Sector Undertaking, valued at Rs. 1 Crores, In the course of execution of the work on 15” May, the Company found while raising the foundation work that it had met a rocky surface and costs of contract would go up by an extra Rs. 25 Lakhs, which would not be recoverable from the Contractes. The Company's accourring year had ended ‘on 319 Maron and the accounts were considered and approved by the Board of Directors on 7” May. How will you treal the aove in the accounts for the year ended 312 March 2020? THIS QUESTIONS TAKEN FROM TEXTBOOK FORBETTER Js UNDERDTANDING OF CONCEPT Not an event occurring after balance sheet date A ASSIGN 4: The Management states that Proposed Dividend does not represent a liability and therefore, no provision need be made As an Auditor, give your views, THIS QUESTION IS TAKEN FROM TEXTBOOK FOR BETTER een UNDERDTANDING OF CONCEPT 'AS~4 | CONTINGENCIES AND EVENTS OCCURING AFTER BALANCE SHEET DATE | 47E | MAIN MATERIAL 2DL LAL WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 ASSIGN 5: A company follows January - Decemberas its Financial Year. The company recognises cheques dated 31% December or before, received from customers after balance sheet date but before aoproval of Financial Statement by debiting Cheques in hand A’c and crediting the Debtors A‘c The Cheque in hand is shown in balance sheet as an item of cash and cash equivalents. All Cheques in hand are oresented to tank in the month of January and are also realized in the same month in normal course after deposit in the bank. Stale with reasons whether collection cf cheques bearing date 31™ December or before, but received alter Balance Sheet date is an Adjusting event and how this fact is to be disclosed by the company? THIS QUESTION IS NOT THERE IN ICAI MATERIAL, TAKEN faaesinsteattasaaaiasi PREFERENCES FROM 45" E MATERIAL FOR BETTER CONCEPT UNDERSTANDING EEN ANG WEAL| Wotan Adjusting Event oe iD ASSIGN 6: A company has filed a legal suit against the debtor from whom 2 50 lakh is recoverable as on 31.03.2020. The chances of recovery by way of legal suit are not good as per legal opinion given by the counse in April 2020, Can the company provide for full amount of ® 50 lakhs as provision for doubtful debts? Discuss. [EEEEEE 22] THIS QUESTION IS NOT THERE IN ICAI MATERIAL, TAKEN i FROM 46" E MATERIAL FOR BETTER CONCEPT UNDERSTANDING SRS iN 7: An earthquake destroyed a major warehousé sf POR Ltd. on 30.4.2019. The accounting year of the company ended on 31.3.2019. The accounts WSFE ADI eyed on 30.6.2019. The loss from earthcuake: is estimated at Rs.25 lakhs. State with reasons, whether then loss due to earthquake is an adjusting or non- adjusting event and how the fact of loss is to be-digclosed by the company. ec A ASSIGN 8: After the closure of financial year Le. 31-03-2020. there wes a severe earthquake. The company lostits building and major plant. and the extent of loss is beyond repair. The company doesn'thave adequate funds to replace the same. Discuss your views based on AS 4. THIS QUESTION IS TAKEN FROM TEXTBOOK FOR BETTER UNDERDTANDING OF CONCEPT Adjusting Event AS! information. 1) A sull against the Company's Advertisement was filed by 2 party on 5* April, 2021, claiming damages of 85 lakns. Surya Limited follows the year April 9 March, Il has followed the financial year following li) Company sends a proposal to sell an immovable property for £45 lakhs in March 2627. The book value of the property is 230 lakhs as on year end date. However, the Deed was registered on 15" April, 2024. iii) The terms and conditions for acquisition of business of another company have been decided by the end of March 2021, but the financial resources were arranged in Apil 2021. The amount invested was 250 lakhs Iv) The company invested Rs. 100 lakhs in April, 2021 before approval of Financial Statements by the Board of directors in the acquisition of another company doing similar business, the negotiations for which hac started during the year. CAINTER | ACCOUNTING STANDARDS | GR2 | 47E 2BPioneer Fon Mec /cec Toca/cwarivat PPR v) Theft of cash amounting to 4 lakhs was done by the Cas the month of March 2021 but was detected on the next day atter the Financial Staterents have been approves by the Directors. vi) On 95.03.2021, % 53,000 cash was collected from a customer but not deposited by the cashier. This fraud was detected on 22.06.2021 i.e before the date of approval of financial statements Keeping in view the provisions of AS-4, you are required fo slate with reasons whether the above events are to be treated as Contingencies Adjusting Events or Non-Adjusting Events occurring after Balance Sheet dale. FERRER eee | JULZ1-SM-100%, SM ILLUSTRATION 4-100% , SM ILLUSTRATION [2a SEES EUSA: A100% = A DIVISION 4: THEORY QUESTIONS (10) | NIL DIVISION 5: ADITIONAL CONGEPT QUESTIONS FOR SELF PRAGTICEIAGSP! ACSP 4: Refer N20-RTP-Question No. 12(@) of Advanced Accounts-Group 2 AGSP 5: Refer N21-MTP1-(5M) Question No.6(o} of Advanced Accounts-Group 2 ACSP 6: Refer D21-Question paper, Question No.1(a) of Advanced Accounts-Group 2 ACSP 7: Sclabeshwar Ltd wants to adjust the bank balance on the Balance Sheet Date by reversing the entity for a cheque issued in the normal course of business and cancelled after the year end but before the finalization of accounts, The cheque was retumed on the ground that the signature differs. Give your views on the above FRereeeiees | LLNOWNO PROBLEMS ASKEDIN THE EXAMIN THIS MODEL. TAKEN FROM TEXTBOOK, SOLUTION: Since the matter relating to difference in signature existed on the Balance Sheet Date (though known aflerwards). tne reversal cf the entiy can be made as on the Balance Sheet Dale ifthe amount is material. ACSP 8: X Oil Ltd, closed the pooks of accounts on March 31, 2018 for which financial statement the balance was finalized oy the Board of Directors on September 04, 2076, Duting the month of December 2015, company undertook the project of laying a pipeline across the country and during May 2076 engineers, realized that cue to unexpected heavy rain, the total cost of the project wil be inflated by RS. 50 lakhs. How this should be provided for in Balance Sheet of 2015-16 in accordance to AS 4? 'AS~4 | CONTINGENCIES AND EVENTS OCCURING AFTER BALANCE SHEET DATE | 47E | MAIN MATERIAL 14Dead gu WWW.MASTERMINDSINDI COM | 98851 25025 / 26 MA7(OLD}RTP ANSWER] Non-Adjusting Event c SOLUTION: This event occurred after March 51, 2016, but before September 04, 2016, is an event ‘occurring after the balance sheet date. But this eventis not affecting financial position on the date of balance sheet therefore it should be disclased in the directors’ report ACSP 9: A Company deals in Petroleum products. The sale price of petroleum is fixed by the Government. After the balance sheet date, but before the finalization of the company's accounts, the Goverment unexpectedly increased the price retrospectively. Can the company account fer additional revenue at the close of the year? [nepeeeceg | HS PROBLEM IS TAKEN FROM AGE MATERIAL FOR BETTER UNDERSTANDING OF CONCEPT No, It Should be Accounted in Next SOLUTION: As per AS - 4, the unexpected increase in the sale price of petrol by the Goverment after the balance sheet date cannot be regarded as an adjusting event as it doesn't represent a condition existing as on the balance sheet date, Hence, revenue (due to inctease in sales price) should be recognized only in the subsequent year with proper disclosure. ACSP 10: Pelani Ltd has its Corporate Office in Mumbal-zind sells its products to Stockists all over India. ‘On 31" March, the Company wanis lo recognize receipt of cheques dated 31* March or before, as "Cheques in Hand”, by reducing "Trade Receivables". The “Cheques it Hand” is shown in the Balance Sheet as an item of Cash and Cash Equivalents. All cheques‘are presented to Bank in the month of April and are also realized in the same month in normal course afier deposifin the Bank. State with reasons, whether each of the following is an Adjusting Event, and hows to be disclosed by the Company? a) Cheques collected by the Marketing Personnél cf the Company trom the Stockists on or before 31* March, b) Cheques sent by the Stockists by through Courier on or before 31° March. ‘THIS PROBLEM IS TAKEN FROM 46E MATERIAL FOR BETTER UNDERSTANDING OF CONCEPT 4a) Adjusting Event; b} Non-Adjusting Event SOLUTION: Marketing Company, being employees of the Company, have collected the amount before 31°! March, and it ‘Cheques collected by the Marketing Personnel constitutes a "receipt" by the Company, before the B/s| of the Company from the Stockisis on or before |date. Subsequent realization in April provides additional 31° March levidence of the matter, and hence the Company can consider this as an "Adjusting Event’ and account for| such items as "Cheques in Hand”, ‘The Company has not ‘received the Cheques before }215! March, and hence, mere sending of the cheques by| Cheques sent by she Stockists trough Counet}ine Stockists through Courier does rot pertain to Jconditons prevailing on the B/s date. This amount [should not be adjusted in the accounts. CAINTER | ACCOUNTING STANDARDS | GR2 | 47E 15Pioneer Fon Mec /cec Toca/cwarivat PPR DIVISION 6: THEORY FOR SELF STUDY INTRODUCTION: 1) This Standard deals with the treatment in financial statements of a) Contingencies, and b) Events occurring atter the balance sheet date, 2) The following subjects, which may resuk in contingencies, are excluded from the scope of this Standard in view of special considerations applicable te them: a) Liabilities of life assurance and general insurance enterprises arising from policies issued. b) Obligations uncer retirement benefit plans; and ¢) Commitments arising from long-term lease contracts ACCOUNTING TREATMENT OF CONTINGENT LOSSES: The accounting treatment of a contingent loss is determines! by the expected outcome of the contingency. If it is likely that a contingency will resuit in a loss to the enterprise, then its prudent to provide for that logs in the financial statements EXAMPLE: ABC has filed case against a debtor for a recovery of 25 Lakhs. According lo the legal team, the chance of recovery is nil. Therefore, ABC should make provision for doubtful debt. ‘The estimation of the amount of a contingent loss to be provided for in the financial statements, may be based on judgement made, by management. If there is conficting or insufficient evidence for estimating the amount of a contingent loss, then disclosure is made of, The existence and amount of guarantees, obligations arising from discounted bills of exchange and similar obligations undertaken by an enterprise are generally discloaed in financial statements by way of note, even though the possibilty that a loss to the enterprise dill ooctir, is remote. ACCOUNTING TREATMENT OF CONTI INS: Contingent gains re not recognised in financial statements since their recognition may reBult 19:3 recognition of revenue which may never be realised. However, when the realisation of a gain is virually certain, then such gain is not a contingency and accounting for the gain is appropriate. ‘The amount al which a contingency 's stated in the financial statements is based on the information which is available at the date on which the financial statements are approved COPYRIGHTS RESERVED TO MASTERMINDS COMMERCE INSTITUTE PVT. LTD., GUNTUR. UNAUTHORISED COPYING ‘OF ANY PORTION OF THIS MATERIAL BY USING PHOTOCOPYING OR ANY OTHER MEANS OR UNAUTHORISED. USAGE OF THIS MATERIAL IS A PUNISHABLE OFFENSE (MAY ATTRACT IMPRISONMENT OR PENALTY OR BOTH! 'AS~4 | CONTINGENCIES AND EVENTS OCCURING AFTER BALANCE SHEET DATE | 47E | MAIN MATERIAL 16Se ae a WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 AS — 5: NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES LEARNING OBJECTIVES 1) Objective and Scope 2) Net orofit or loss for the period a) Ordinary items b) Ordinary but exceptional ites ©) Extra ordinary items 3) Prior period items, 4) Changes in accounting estimates 5) Changes in accounting policies ANALYSIS OF PAST EXAM PAPERS OF GAINTER ‘Ordinary, Exceptional and Extraordinary tems Prior period items and Changes in Accounting] Estimates . ‘Changes in Accounting Policies [Comprehensive Models ILLUSTRATION 1 ‘CROS. M18-RTP GRD? ILLUSTRATION 2 CRD MAB-SH GRD Sib} ILLUSTRATION 3 {CRO Aja) NieRTP CRDE ILLUSTRATION 4 ‘CRDS: NiB-NTP2-SM RDS M19-RTP CRD 51a} MI-TP 1-5 RDG NiGRIP. RDS NAB.TPY-5M RDS M20-RTP RDS 1M20-HITP-5ML RDS N2O-RTP CRO 6(90%) TAN 21-54 CRO? MZ MTP TSH ‘ASSIGN Sic] M2 NTP2M CRD Sic} NZLRTP (604, CRD G(d) CAINTER | ACCOUNTING STANDARDS | GR.2 | 47E | MAIN MATERIAL 1PIONEER FOR MEC / CEC TO CA/ CMA FINAL Co CHAPTER OVERVIEW Cocos suu vag Olee sung gannnurn nine 1)___ [THEORY FOR CLASSROOM DISCUSSION 2) PROBLEMS FOR CLASSROOM DISCUSSION (CRD) 3) [ASSIGNMENT PROBLEMS (ASSIGN) 4)___ | THEORY QUESTIONS (7) '5)___ [ADDITIONAL CONCEPTS FOR SELF PRACTICE (ACSP) 6) | THEORY FOR SELF STUDY 1) OBJECTIVE & SCOPE: The purpose of this standard Is to provide for a) Classification, and Disclosure of. 1) Certain ordinary Items (Ordinary but exceptional items) i) Extra ordinary lems Ill) Prior peried Items b) Accounting treatment for change in accounting estimates ©) Disclosures ‘or changes in Accounting Policies To enhance the comparabilly of the financiai'staleménts of an enterprise over time and with the financial statements of other enterprises. This standard does not cover tax aspects:or' above items. 2) NET PROFIT OR LOSS FOR THE PERIOD: Alitems of incomes and exoenses which are recognised in @ period should be included in the défétmination of net profit or loss for the peviod unless an Accounting Standard requires or permits otherwise. The net profit or loss for the period comprises the following components, each of which should be disclosed on the face of the statement of profil and loss: a) Profit or loss from ordinary activities: Any activities which are undertaken by an enterprise as ari of ils business and such jelaled activities in which the enterprise engages in furlherance of, Incidental to, or arising from, these activities, Related & incidental to such cue Examples: Rent paid, Salaries Paid, Bonus paid to employees, Interest received, Dividend paid, Purchase and sale of goods and services, loss on sale of unsold inventory at the end of the season, Profit on sale of fixed assets, Profit on sale ot Investments etc. Not all ordinary items are to be disclosed separately, certain items of ordinary are to be disclosed separately which are commonly termed as “Exceptional items”. There is no such term as ‘exceptional item under AS § and Schedule III 1o the Companies Act, 2013, however, the same has been used for better understanding of the requirement. ‘AS~5 | NETPROAT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES | 4762ee oman Ta WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 b) Exceptional items: When items of income and expense within profit or loss from ordinary aciivities are of such size. nalure or incidence thal their disclosure is relevant to exolain the performance of the enterprise for the period Exceptional items should be disclosed separately in statement of Profit & Loss Account as.a part of Net profit or Loss for the period, covering the nature and amount of such items, Example: i) The write-down of inventories to net realisable value as well as the reversal of such write-cowns ii) Restructuring activities of an enterpnise and the reversal of any provisions for the costs of restructuring Disposals of items of fixed assets. iv) Disposals of long-term investments v) Legislative changes having retrospective application vip Litigation settements vii) Other reversais of provisions ¢) Extraordinary items: Income or expenses that arise fram events or transactions that are clearly inet from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly. From the above definition, following points can be understood Extraordinary items are : i) These activities which are clearly distinct fiaih theprdinary activities of the entity. ii) These are not exoected to occur as part of business. iii) Generally, frequency of these transaefiing.8 lol. Bul frequency is not the only criteria to determine. iv) Classification of items is basedibn the'NATURE of the item but NOT on frequency: Classification requires some degree of professional judgement, Example: Loss suffered due to earthquake, fire accidents, Refund of Government Grant, ailachment of property. seizure of assets by government. etc. Whelher an event or transaciion is clearly distinc! from the ordinary activilies of the enterprise is determined by the nature of the event or transaction in relation to the business ordinarily carried on by the enlerprise rather than by the frequency with which such events are expected to occur. For example, sale of fixed assets in an entity is not frequent (non-recurring) but itis very much usual in a business to purchase and sell a fixed asset, hence profit on sale of fixed asset is not an extraordinary item. ‘An event or transaction may be extracrdinary for one enterprise, but not so for another enterprise because of the differences belween their respective ordinary activities and regular business activities. Example: * Claims from policyholders arising from an earthquake do not qualify as an extraordinary item for an insurance enterprise that insures against such risks. * Hurricane may be an extzordinary item for Indian companies, but it may not be the same for US, because hurricanes are very likely fo hit Florida during certain times of the year. CONCEPT QUESTION 4{CRD}: State whether the following statements are true or false, 4) AllOporating activities are ordinary itoms and investing a6 wall as financing aro extraordinary itoms. b)_Allextraordinary items are non-recurring, but all non-recurring items are not extraordinary items, CAINTER | ACCOUNTING STANDARDS | GR.2 | 47E | MAIN MATERIAL 3PIONEER FOR MEC / CEC TO CA/ CMA FINAL Co Extraordinary items should be disclosed separately in the statement of prot and loss as a parl of net profil or loss for the period. WHY SEPARATE DISCLOSURE? ‘To enhance comparability. To make better future projections WHAT ARE THE DISCLOSURE REQUIREMENTS? 4) Nature of transaction 2) Quantum (Amount) of transaction The nature and the amount of each extraordinary item should be separately disclosed in the staterent of profit and loss in 2 manner that its impaict on current profit or less can be perceived CONCEPT QUESTION 2(CRD}: Classify the following items as per AS 5. a) Embezzlement (stealing) of cash, b) Creation of provision ©} Voluntary retirement expense. Copyrights Reserved To MASTER 0) Bad debts, MINDS COMMERCE INSTITUTE PUT. fe) Retrospectiveincrease of salaries. f) Compensation paid by insurance company. 9) Asuit for damages for breach of contract. hh) Profit or Loss on sale of investmentsby-inve i) Pilferaye (stealing) of stock. a i) Salary paid. ky Sale of serap. 1) Fire occurred & reported loss, EXTRACT OF STATEMENT OF PROFIT OR LOSS AS PER SCHEDULE III (for better understanding of presentation) 1) [Revenue from operations 300K 064] it) [Other Income 2% xxx Ml) [Total Revenue (I+ 1) 2K 2K 1M) [Expenses 2K XxX ¥) | Profit before exceptional and extraordinary items and tax (Ill-1V) 20K 200 Vi) [Exceptional items 300K 064] Vil} [Profit before extraordinary tems and tax (V -VI) 2% xxx Vill) [Extraordinary items 004 004] 1X) [Profits before tax {VII - VIII) XK XXX 3) PRIOR PERIOD ITEM: ior period items are incomes or expenses which arise in the current period ‘a8 a resull of errors or omissions in the preparation of the financial statements of one or more prior periods. ‘AS~5 | NETPROAT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES | 47E&ee oman 4 WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 Errors: a) Mathematical mistakes b) Mistakes in applying accounting policies ©} Misinterpretation of facts mission (Oversight / F: notice): Omission means reliable information was available at the time of preparation of PY financial statements, but the information was NOT considered. Prior period items should be disclosed separately in the Profit and Loss afc so as to show the impact of prior period items in the current year, Prior period items are normally included in the determination of net profit or loss for the current period An alternative approach is to show such items in the statement of profit and loss after determination of ‘current net profit or loss. In either case, the objective is to indicate the effect of such items on the current profit or loss, CONCEPT QUESTION 3(CRD): During the course ofthe last three years, a company owning, and operating Helicopters lost four Helicopters. The company’s accountant fat that ater the crash, the maintenance provision created in respect of the respective helicopters was no longer required and proposed to write i back to the Profit and Loss account as a prior period tem. |s the company's proposed accounting treatment, correct? Discuss. CONCEPT QUESTION 4(CRD): In preparing the financial statements of Check Lid for the year ended 31%*March, you come ‘across that there was a major theft of stores valued at Rs. 10 Lakhs in the preceding year which was detected only during the current financial year. State with reasons, how you would deat with them in the financial statements. (N21RTP} CHANGES IN ACCOUNTING ESTIMATES: . a) MEANING OF ACCOUNTING ESTIMATES: Accounting estimates can be described as the ‘approximation of the amount to be debited or credited in the respective account, where no precise means of measurement are readily avaljabl Mostly they are used in the deterriination f the carrying value of assets and liabilities in the balance sheet at the end of the specific date, ‘and their respective heads in the Profit & Loss during the specific period. Examples: Uselu! fe of asset in case of depreciation, Warranty Estimates, Provision for doubttul debts, Contingent Liabilities b) NEED FOR CHANGE IN ACCOUNTING ESTIMATES: Accounting estimates by their nature are approximations that may need revision as additional information becomes known An estimate may have te be revised if changes occu’ the circumstances based on which the estimate was made a) Asa result of new information b) More experience ¢) Sudsequent development c) ARE THEY CONSIDERED AS PRIOR PERIOD ITEMS? Income or expense recognized on the outcome of 2 contingency which previously could not be estimated reliably does net constitute a prior period item. Estimations are revised in the above circumstances but not because of errors or omissions. Hence revision of estimation is NOT a prior period item. 4) CLASSIFICATION AND ACCOUNTING TREATMENT; The effect of a change in an accounting ‘estimate should be classified using the same classification in the statement of profit anc! loss as was used previously for the estimate. Le.. Ifthe original estimate is ordinary, then change in estimate is a'so ordinary similarly if original estimate Is extra-ordinary, then change in estimate is also exira-ordinary. CAINTER | ACCOUNTING STANDARDS | GR.2 | 47E | MAIN MATERIAL 5PIONEER FOR MEC / CEC TO CA/ CMA FINAL Co ‘Changes in Accounting estimates are to be accounted prospectively. ) DISCLOSURES: The effect of a change in an accounting estimate should be included in the determination of net profit or loss in i) The period of the change if the change affects the period only; or ii) The period of the change and future periods if the change affects both. For example, a change in the estimate of the amount of bad debts is recognized immediately and therefore alfects only the current period, However, a change in the eslimaied useful life of a depreciable asset affects the depreciation in the current period and in each period during the remaining useful life of the asset, The nature and amount of a change in an accounting estimate which has a material effect in the current period, or which is expected to have a material effect in sulssecuent periods, should be disclosed. If il is impracticable to quantify the amount, this fact should be disclesed, CONCEPT QUESTION 5{CRD}: Abhay Ltd provided Rs. 15 Lakhs for inventory obsolescence in the last year. In the subsequent year, i was determined that some 50% of such stock was usable. The company wants to adjust the same through Prior Period Adjustmont Account as the provision was made in the oarlir yoar. State your vious. 5) CHANGES IN ACCOUNTING POLICY: As Accounting policy refers to specific accounting principles as ‘well as the methods used for applying those principles; a change in either of them (.e., principle or even the method used for applying that) would amour to change in accounting policy. ‘An accounting policy can be changed if the change is, a) By a statute (cr) b) By an accounting standard (or) ©} For more aporopriate presentation of fifancial [Actualy, there is no guidance in AS-5 on 2ecounting for change in accounting policy As a practice |&as per IND AS change in accounting pdlity is accounted retrospectively. The following are not changes in accounting policies i) The adoption of an accounting policy for events or transactions that differ in substance from previously occurring events or transactions. The adoption of a new accounting poliay for events or transactions which did not ocour previously or that were immaterial DISCLOSURE OF CHANGE IN ACCOUNTING POLICY: Any change in an accounting policy whicn has a material effect should be cisclosed The impact of, and the adjustments resulting from, such change, if matenal, snould be shown in the financial statements of the period in which such change is made, to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period, but which is reasonably exoected 10 have @ material effect in later periods. the fact of such change should be appropriately disclosed in the period in which the change is acopted. COPYRIGHTS RESERVED TO MASTERMINDS COMMERCE INSTITUTE PVT, LTD., GUNTUR. UNAUTHORISED COPYING OF ANY PORTION OF THIS MATERIAL BY USING PHOTOCOPYING OR ANY OTHER MEANS OR UNAUTHORISED USAGE OF THIS MATERIAL IS A PUNISHABLE OFFENSE (MAY ATTRACT IMPRISONMENT OR PENALTY OR BOTH) ‘AS~5 | NETPROAT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES | 4766ee oman WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 Change in Accounting Policy ‘ali ‘i Not material for current period but Material in Current Period ‘material for later periods Not ascertainablo (wholly orin part} Amount to be disclosed Fact to be disclosed DIVISION 2: PROBLEMS FOR CLASSROOM DISCUSSION [t cRD a) During the year 2017-18, 2 medium size manufacturing company wrote down its inventories to net realizable value by ® 5,00,006. Is there any requirement of a separate disclosure? b) A company signed an agreement with the Empioyess;Union on 1.92016 for revision of wages with Felrospeciive effect irom 30.9.2015. This would cast the company an additional liabilly of € 5 lakh per annum. Is @ separale disclosure necessary for thie amoyttkpaid in 2016-177 Fact af such chango in lator period tobe disclosed in current period | Amountis ascertainable | SHALLUSTRATION2-100% Have net ist SOLUTION: a) AS 5on'Net Profitor Loss for the Period, Prior Period Items and Changes in Accounting Policies’ states that: “When items of income and expense within prott or lass from ordinary activities are of such size, nature, or incidence that their cisclosure is relevant to exolain the performance of the enterprise for the period, the nature and amount of such items should de disclosed separately.” Although the given case does not relate (o exiraordinary item, but the nature and amount of such item may be relevant to users of financial statements in understanding the financial position and pertormance of an enterprise and in making projections about financial positon and gerformance. Circumstances which may give to separate disclosure of ilems of income and expense in accordance with AS 5 include the write-down of inventories to net realisable value as well as the reversal of such write-downs b) It is given that revision of wages took place on 1 September 2076 with retrospective effect from 30.9.2015. Therefore, wages payable for the half year from 1.10.2015 to 21 3 2016 cannot be taken as an error or omission in the preparation of financial statements and hence this expenditure cannot be taken a8 a prior period item. Additional wages liability of Rs, 7,50,000 (for 1% years @ Rs. §,00,000 per annum) should be included in current year's wages, It may be mentioned that additional wages are an expense arising from the ordinary activities of the company. Such an expense does not qualify as an extraordinary item. However, as per AS 5, when items oF income and expense within profit cr loss from ordinary actvities are of such size, nature, or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately, CAINTER | ACCOUNTING STANDARDS | GR.2 | 47E | MAIN MATERIAL ?PIONEER FOR MEC / CEC TO CA/ CMA FINAL Co CRD 2: Bela Lid. has a vacant land measuring 20,000 sq.mis, which i had no intention to use in the future. The Company decided to sell the lane to tide over its liquidity problems and made a profit of Rs19 Lakhs by ‘selling the said land. Moreover, there was a fire in the factory and a part of the unused factory shed valued at Rs. 8 Lakhs was destroyed. The loss from fire was set off against the profit from sale of land and profit cf Rs. 2 lakhs was disclosed as net orofil from sale of assets. You are required to examine the treatment and dlisciosure done by the company and advise the compary in line with AS 8. NiaRTP SOLUTION: APPLICABLE AS AND ITS PRINCIPLE: As per AS 5 “Net Profil or Loss for the Period, Prier Period tems and Changes in Accounting Policies’ Extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for the period. The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived ANALYSIS: In the given case, selling of land 1o tide over liouidation problems as well as fire in the Factory does not constitute ordinary activities of the Company. These items are distinct from the ordinary activities of the business. Both the events are material in nature and expected not to recur frequently or regularly. Thus, these are Extraordinary items. CONCLUSION: Therefore, in the given case, disclosin from sale of land is not correct. The profit on sale of in the slalement of profit and loss, ‘Het profits by setting off fire losses against profit $s due to fire should be disclosed separately CRD 3: Fuel surcharge is billed by the StaléEiect/i¢ity Board at provisional rates. Final bill for fuel ‘Surcharge of & 5.30 lakhs for the period Octoser 2074 to September 2077 has been rece'ved and paid in February 2018. However, the same wag'accourted in the year 2018-79. Comment on the accounting treatment cone in the said case. ‘SMLILLUSTRATION 1.100% : [RBC CATEGORISATION: A SOLUTION: APPLICABLE AS AND ITS PRINCIPLE: As per AS 5 ‘Net Profit or Loss for the Period, Prior Period tems and Changes in Accounting Policies”, Prior period items are inoome/expense recognised in the current year as a result of errorsiomission in the previous year(s) ANALYSIS: The final bill having been paid in February 2018 should have been accounted for in the annual accounis of the company for the year ended 31% March 2018. However, i seems thal as a resull of error or omission in the preparation of the financial statements of prior period i.e , fer the year ended 31°! March 2018, this material charge has arisen in the current period .e., year ended 31% March 2019, Therefore, it should be Ireaied as ‘Prior period item’ as per AS 5. CONCLUSION: As per AS 5, prior period items are normally included in the determination of net profit or loss for the current period An alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss. In either case, the objective is to indicate the effect of such items on the current profit or loss. It may be mentioned that itis an expense arising from the crdinary course of business. ‘AS~5 | NETPROAT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES | 47E 8Se ae a WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 NOTE: 4) Although abnermal in amount or infrequent in occurence, such an expense does not qualify an extraordinary item as per AS 5. 2) For better understanding, the fact that power bill is accounted for at provisional rates billed by the state electricity beard and final adjustment thereof is made as and when final bill is received may be mentioned as an accounting policy. CRD 4: a) Omega Lid finds that the stock sheets of 31.3.2021 cid nol include two pages coniaining details of inventory worth 14.5 lakh. State, how you will ceal in the accounts of Omega Ltd. for the year ended 31st March 2022 with reference to Accounting Standards b) A Limited Company finds thal the stock sheets as on 31.03.2010 had included twice an item the cost of which was Rs. 20,000. You are asked to suggest, now the error would be dealt with in the accounts of the year ended 31.03.2017 ‘SMHILLUSTRATION 3-100% SOLUTION: a) As per AS &, “Net Profilor Loss for the Period, Prior Period llems and Changes in Accounting Policies”. Prior Period items are “income or expenses which alisé in the current period as a result of errors or ‘omissions in the preparation of the financial stalements of one or more prior periods”. In the given situation, the entity had reliableinformétion as on 313.2022 but it felled to consider (omission) that in preparation of financial statements. Itamounts to prior period item as per AS 5, Hence “by adding % 14.5 Lakh to the opening stock of ‘88. prior period adjustment in the Proit anc loss Alc. 1.4.2022. It is also necessary to show 27% h) As perAS 5, "Net Profil or Loss for the Peridi Prior Period Items and Ghanges in Accounting Policies", Prior Period items are "income or expenses which arise in the current period as a result of errors or ‘omissions in the preparation of the financial statements of one or more prior periods” The error in the recording of closing stock of the year ended 31* March 2010 must have also resulted in overstatement of profits of previous year, brought forward to the current year enced 31* March 2011 Accordingly, Rs. 20,000 should be deducted ftom opening stock in the trading account and should be charged as prior period adjustment in the profit and loss account fer the year ended 31% March 2011 in accordance with AS-5 which requires thal the nalure and amount of prior period items should be separately disclosed in the statement of profit and loss account in a manner that their impact on the ‘current profil or loss can be perceived, ERD §: POR Lic. is in the process of finalizing its accounts for the year ended S1st March 2018. The ‘company seeks your advice on the following a) Goods worth Rs.5,00,000 were destroyed cue to flood in September 2015. A claim was lodged with insurance company. Butno entry was passed in the books for insurance claim in the financial year 2075- 46, In March 2018, the ciaim was passed, and the company received a payiient of Rs.3,50,0C0 against the claim. Explain the treatment of such receipt in final account for the year ended 21st March 2018. b) Company created a provision for bad and doubtful debts at 2.5% on debtors in preparing the financial statements for the year 2017-18. Subsequently, on a review of the credit period allowed and financial capacity of the customers, the company decides to increase the provision to 8% cn debtors a8 on 31.08.2018, The accaunis were not approved by the Board of Directors til the date of decision. While applying tne relevant accounting standard, can this revision be considered as an exlra-ordinary ile) or prior period item? CAINTER | ACCOUNTING STANDARDS | GR.2 | 47E | MAIN MATERIAL 8PIONEER FOR MEC / CEC TO CA/ CMA FINAL Co ¢) SB. Lid. makes provision for expenses amounting Rs. 7,09,000 as on March 31,2020, but the actual ‘expenses during the year ending March 31,2021 comes lo Rs, 9,00,000 against provision made during the last year, Stale with reasons whether difference of Rs. 2,00,000 is to be treated as prior period item a8 per AS 5 'Net Profit or Loss for the Period, Prior Peried Items and Changes in Accounting Policies’ ii | ASSEGNBIENT PROBLEM 10:88: FREESE | wrosu-1o0, wo. urP2su-t0oy, WB RTP. 10% 5 SOLUTION: a) As per the provisions of AS 6 "Net Profit or Loss for the Period, Prior Period Items and Changes in ‘Accounting Policies’, prior period items are income or expenses, which arise, in the current period as a result of error or omissions in the preparation cf financial statements of one or more prior periods. Further, the nature and amount of prior period items snould be separately disclosed in the statement of profit and loss in a manner that their impact on current profit or loss can be perceived. In the given instance, it is clearly a case of errorfomission in preparation of financial statements for the year 2015-18, Hence, claim received in the financial year 2017- 16 is a prior periad item and should be separately disciosed in the statement of Profit and Loss. b) As per AS 5, the revision in rate of provision for doubtful debts will be considered as change in estimate and is neither a prior period item nor an extraordinary item. In the given case, a limited company created 2.5% provision for doubttul debts for the year 2017-2018 Subsequently, the company revised the estimates basett-on the changed circumstances and wants to create 8% provision It should be accounted pros; ty However, as per AS 5 (Revised), a change in abédunting estimate which has a material effect in the current period should be disclosed and quantified. Any. change in the accounting estimate which is expected to have a material effect in later periéds should also be disclosed ‘The effec of such change should be shown inthe pit and joss acoount forthe year ending 31% March 2018 €) As per AS 5 Net Profi: or Loss forthe’ Period Bor Period Items and Changes in Accounting Policies, 228 a resultof the uncertainties inherent in business activities, mary financial statoment items cannot be measured with precision but can only be estimated. The estimation process involves judgments cased. on the latest information available. The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability. Estimates may have to be revised, if changes occur regarding the circumstances on which the estimate was based, or as a result of new information, more experience or subsequent developments, As per the standard, the effect of a change in an accounting estimate should be classified using the same classification in the sialement of profit and loss as was used previously for the estimate. Prior period items are income or expenses which arise in the current period as a result of errors or missions in the pregaration of the financial statements of one or more prior periods. Thus, revision cf an estimate by its nature i.e., the difference of Rs. 2 lakhs are not a prior geriod item. Therefore, in the given case expenses amounting Rs 2,00,008 (ie , Rs. 9,00,000- Rs. 708,000) recorded in the current year, should not be regarded as prior period item GRD 6: The Accountant of Mobile Limited has sought your opinion with relevant reasons, whether the Tollowing transactions will be treated as change in Accounting Policy or not for the year ended 31% March 2017, Please advise him in the following situations in accordance with the provisions of AS a) Provision for doubtful debts was created @ 2% till 31 March 2018, From the Financial year 2076-2017, the rate of provision has been changed to 3%, h) During the year ended 31* March 2017, the management has introduced a formal gratuity scheme in place of ad-hoc ex-gratia payments to employees on retirement. 6) Till the previous year the furniture was depreciated on straight line basis over a period of S years. From current year, the useful life of funiture has been changed to 3 years. ‘AS~5 | NETPROAT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES | 47E 10ee oman Ta WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 d) Management decided to pay pension to those employees who have retired after completing 5 years of servioe in the organization. Such employees will gel pension of Rs, 20.000 per month. Earlier there was no such scheme of pension in the organization, @) During the year ended 34% March 2077, there was change in cost formula in measuring the cost of inventories ‘SHMILLUSTRATION 4, N18-RTP, Nf@sMTP1-5M, N18-MTPZ-Si, N19-RTP, 119-MTPT-SM, N1-MTP1-5M, SM20- RTP, M20-MITP.5H, N2O-RTP, N21-RTP : A SOLUTION: a) In the given case, Mobile limited created 2% provision for doubtful debts fill 31st March 2016. Subsequently in 2018-17, the company revises the estimates based on the changed circumstances and wants 10 create 3% provision. Thus, change in rate of provision of doubtful debt is caange in estimate and is not change in accounting policy. This change will affect only current year b} As per AS, the adoption of an accounting policy for events or transactions that differ in substance trom previously occurring events or transactions, wil not be considered as a change in accounting gclicy. Introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees on retirement is a transaction which is substantially different fron the previous policy, will not be treated as change in an accounting policy, ©) Change in useful ite ot furniture trom 5 years to 3 years a change in estimate anc!is net a change in accounting policy. d) Adoption of a new accounting policy for events or arisactions which cid not occur previously should not be treated as a change in an accounting poligy. Hénce the introduction of new pension scheme is not a change in accounting policy ) Change in cost formula used in measutéient of Cost of inventories is a change in accounting policy. CRD 7: State whether the following items aré:an example of change in Accounting Policy / Change in ‘Accounting Estimate / Extraordinary items / Prior period ems / Ordinary activity. a) Actual bad debts turing out fo be more than provisions, bh} Change from Cost model to revaluation model for measurement of camying amount of PPE ¢) Government Grant receivable as compensation for expenses incurred in previous accounting period ) Treating operating lease as finance lease ) Capitalization of borrowing cost on working capital )_ Legislative changes have long term retrospective application @) Change in method of depreciation from straight ine to WDV h) Government grant become refundable i) Appiying 10% depreciation instead of 15% on furniture J) Chenge in useful life of fixed assets JANZ1-5M-100% CAINTER | ACCOUNTING STANDARDS | GR.2 | 47E | MAIN MATERIAL PrPIONEER FOR MEC / CEC TO CA/ CMA FINAL Co N OF GIVEN ITEMS IS AS FOLLOW: SOLUTION: IFICA’ iy [Actual bad debts turning out to be more than provisions: iy [Change from Cost model to Revaluation mode! for measurement of carrying amount of PPE iy [Goverment grant receivable as compensation for expenses incurred in previous accounting period iv) _| Treating operating lease as finance lease. Prior period ems Prior-period Items (@s interest on working Capital loans is not eligible for capitalization) ordi ‘Change in Aocounting Estimates ‘Change in Accounting Policy Extra -ordinary Items ¥) | Capitalisation cf borrowing cost on working capital vi [leaislative “changes “having longterm retrospective application Change in the method of depreciation from straight ary Activity (but exceptional) ‘Change in Accounting Estimates line to WDV Government grant beooming refundable Extra -ordinary hems ix) [APPlving 10% depreciation instead of 15% on| a. iy ere Prior- period lems x) _ [Change in useful life of fixed assets: (Change in Accounting Esiimates| ASSIGN 4: Tiger Motor Car Limited signed ati agreetfient with its employee's union for revision of wages 09 01.07.2018. The revision of wages is with retrospective effect from 01.04.2074, The arrear wages up to 24.3.2018 amounts lo RS. 40,00,000 and thal fer thé period from 01.04.2018 10 01.07.2018 amount lo RS. 8,50,000. In view of the provisions of AS 5 ‘Net Profit or Less for the petiod, Prior Period Items and Chenges in Accounting Policies", decide whether a separate disclosure of arear wages is required while reparing financial statements for the year ending 313.2019, WE HAVE TAKEN THIS PROBLEM FROM TEXTBOOK FOR BETTER UNDERSTANDING OF CONCEPT Yes. ASSIGN 2: Megha Lte. has a vacant land measuring 70,000 sq mts, which it had no intention to use in the future. The Company decided to sell the land to tide over its liquidity problems and made a profit of R835 Lakhs by selling the said land. Moreover, there was a fire in the factory and a part of the unused factory shed valued at Rs. 28 Lakns was destroyed. The loss from fire was set off against the profit from sale of land and proiil of Rs. 7 lakhs was disclosed as net profit rom sale of assets, You are required to examine the treatment and disclosure done by the company and advise the company in line with AS 5. ‘WE HAVE TAKEN THIS PROBLEM FROM 457% E MATERIAL FOR fizz CORRESPONDING CRD PROBLEM Incorrect treatment by company; treated as extraordinary items JAG: GATEEOHISATI ASSIGN 3; Fuel surcharge is billed by the State Electricity Board at provisional rates. Final bill for fuel surcharge of & 10 lakhs for the period October 2014 to September 2018 has been received and paid in February 2019, However, the same was accounted in the year 2019-20. Comment on the accounting treatment done in the said case. ‘AS~5 | NETPROAT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES | 476 12ee oman Ta WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 ‘WE HAVE TAKEN THIS PROBLEM FROM 461 E MATERIAL FOR (RRSREnC ES CORRESPONDING CRD PROBLEM enn arene Prior period item A ASSIGN a) Stock audit verification during the year revealed that, opening stock of the year was understated oy Rs.3 lakhs due to wrong counting, State, how you will deal in the accounts for the year ended 31% March 2019, i.e., current year with reference to Accounting Standards. b) A Limited Company finds that the stock sheets as on 31.03.2018 had included twice an item the cost of which was Rs. 50,000. You are asked to suggest, how the error would be dealt with in the accounts of the year ended 31.03.2019, WE HAVE TAKEN THIS PROBLEM FROM TEXTBOOK FOR BETTER UNDERSTANDING OF CONCEPT @)_Prior Period item: _b) Prior period item bie nae —q ASSIGN 5; ABC Llc. is in the process of finalizing its aecounts for the year ended 31% March 2018. The company seeks your advice on the following: ) Goods worth Rs.10,00,000 were destroyed due to flood in September 2015. A claim was lodged with insurance company. Bul no entry was passed in the books for insurance claim in the financial year 2015- 16, In March 2018, the claim was passed, and the company received a payment of RS.7,00,000 against the claim. Explain the treatment of such receipt in final. aécount for the year ended 31% March 2078. b) Company created a provision for bac and doubifel. debis al 5% on debiors in preparing the financial statements for the year 2017-18. Sudsequertly, Qt) a revieW of the credit period allowed and financial capacity of the customers, the company decitiés toyndrease the provision to 16% on debtors as on 31.08.2018. The accounls were not approved by the: Board! of Directors ill the dale of decision. While applying the relevant accounting standard, revision be considered as an extra-orcinary item o prior period item? 5 €) Acompany created a provision of Rs. 7,50,000 ‘or staff wellare while preparing the financial siatements for the year 2020-21. On 31% March 2021, ina meeting with staff welfare association, it was decided to inorease the amount of provision for siaif welfare to RS. 10,00,000. The accounts were approved by Board of Directors on 15" April 2021 ‘You are required to explain the treatment of such revision in financial statements for the year ended 31° March 2021 in jine with the provisions of AS 5? fi M2A-MTPT-SM-100% |e dnsluee |) Pio period tem; b) Change in accounting extmae [ch change in accounting estimate ASSIGN 6: The Accountant of Lava Limited has sought your oginion with relevant reasons, whether the following transactions will be treated as change in Accounting Policy or not for the year ended 3st March 2079, Please advise him in the following situations in accordance with the provisions of AS 5 a) Provision for doubttul debts was created @ 4% till 31st March 2078. From the Financial year 2018-2019, the rate of provision has been changed to 6%. b) During the year ended 31st March 2019, the management has introduced a formal gratuity scheme in place of ad-hoc ex-gratia payments to employees on retirement. ¢) Till he previous year the furniture was depreciated on straight line basis over a period of 10 years. From current year, the usefu! life of furniture has been changed to 8 years, d) During the year ended 31% March 2079, there was change in cost formula in measuring the cost of inventories CAINTER | ACCOUNTING STANDARDS | GR.2 | 47E | MAIN MATERIAL 3PIONEER FOR MEC / CEC TO CA/ CMA FINAL Co ‘WE HAVE TAKEN THIS PROBLEM FROM 461 E MATERIAL FOR (RRSREnC ES CORRESPONDING CRD PROBLEM enn arene a) No; b} No; ¢) No; dj Yes. A ASSIGN 7: Classify the following items as per AS - 5: 1) Major disposal of fixed assets 2) Change in useful life of the asset 3) Fixed assets destroyed in an earthauake 4) Mathematical error in calculation of deprecation in PY 5)_Change in depreciation method 6) _Loss sustained as a result of enemy action 7)_Disposal of Long-term investments of a trading entity 8) Payment of arrears of wages of previous years in the CY— as per the revised agreement in CY 9) _Change in warranty policy of the comoany. PREFERENCES; WEHAVE TAKEN THIS PROBLEM FROM 46™ E MATERIAL FOR iii aecicsi 2) :33/3730308 rece CORRESPONDING CRD PROBLEM Ee A DIVISION 4: THEORY QUESTIONS (TQ) DIVISION 5: ADITIONAL CONCEPT QUESTIONS FOR SELF PRACTICE IACSP! Copyrights Reserved To MASTER 10S COMMERCE INSTITUTE PYT.T ACSP 4: Closing Stock for the year ending on 31.3.2018 is % 60,000 which includes stock damaged in a fire in 2076-2017. On 31.3.2017, the estimated Net Realizable Value of the damaged stock was % 18000. The revised estimate of Net Realisable Value included in Closing Stock of 2017-2018 is # 5,000 Find the value of Closing Stock to be shown in Profit anc Loss Account for the year 2017-2018. [WE HAVE TAKEN THIS PROBLEM FROM 46 E MATERIAL FOR BETTER UNDERSTANDING OF CONCEPT. é fe meee Bp SOLUTION: In the given case, there is no error or omission in the prior period. It is a case of chang accounting estimate relating to the NRV of damaged item. Hence, stock of damaged item, should be written down to its Revised NRV Rs.6,000 and the difference i.e., loss of Rs.10,000(15,000-5,000) should be written off fo PAL as a separate item. Valuation of damaged stock = Rs.5,000 being lower of earlier Carrying Amount of Rs.15,000 or Revised NRV of Rs.5,000 'AS~5 | NETPROAT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES | 47E 14Se ae a WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 Valuation of olher stock = Rs.§5,000 (Rs.60,000 - Rs 5,000} So, Value of stock as on 31.03.18 = Rs. 5,000(damaged goeds) + Rs.65,000(ether than damaged goods) = Rs.60,000 ACSP 2; Sama was working with ABC Ltd. drawing monthly salary of Rs. 25,000 per month. She went on maternity leave with pay for 7 months ie., from 01-01-2017 to 31-07-2017. Her salary for 3 monihs was nol proviced for in financial statements for F.Y. 2015-17 due to omission. Wnen she joined after leave period, the whole salary for 7 months was paid to her. You are required to: a) Pass the necessary journal entries in F_Y. 2017-18 to record the above transaction as per accounting standard-5 and state reason for the same. b) Would the treatment have been different, if Shama was terminated on 01-01-2017 and was reinsiated in service by the court w.ef 01-08-2017 with instruction to pay Shama salary for the intervening period Le. 01-01-2017 to 81-07-2017 FFT] WE HAVE TAKEN THIS PROBLEM FROM 46" E MATERIAL FOR lien BETTER UNDERSTANDING OF CONCEPT, SOLUTION: As per AS 5°Net Profit or Loss for the Period’, Prior Period lems and Changes in Accounting Policies, the term ‘prior period items’, refers to income o7-¢xpenses which arise in the current period as a result of errors or omissions in the preparation of the finaneial statements of one or more prior periods. The nature and amount f prior period items should be tay discloses in the statement of pro’t and loss so thal their impact on the current proft or loss cari be perée ved. Hence, in this case selary paid to Shama for'S months Le., 1.1.2017 to 31.35.2017 Rs.75,200-will,bé:Siassified as prior period ftem in FY 2017-18 and following journal entry shall be passed : a) Journal entry in FY 2017-18: Salary A/c (Rs 25,000 x 4) Dr. 700,000 Prior period itern (Rs 25,000 x 3) Dr. 75,000 To Bank Ale 4,75,000 (Salary related to 7 months pai out of which 3 months’ salary is prior period item) Alternative Entry: Salary A’c (prier period item) Dr. 75,000 To Bank Aic 75,000 (Salary related to 2 months i.e., January 2017 to March 2017 paid in 2017-2018) Salary Alc Dr. 100,000 To Bank Aic 4,00,000 (Salary related to 4 months paid on 1.8.2017 for April to July 2017) b) AS 5 inter alia states that the term ‘prior period items’ does not include other adjustments necessitated by circumstances, which though related to prior periods, are determined in the current period. Accordingly. in the second case though Shama was lerminaled on 1.1.2017 ie., in 2016-2017, yel she was reinstated due to court's order in 2017-2078, with the instruction by the court to pay the salary for the intervening period i.e., with retrospective effect from January 2017. The adjustment of salary of Rs75,000 (for January 2017 to Merch 2017) would not be considered as prior period item and will be accounted for in the books as current year expense. Thus, the entire amount of Salary of Rs1,75,000 for January 2017 to July 2017 is a current year expense only. CAINTER | ACCOUNTING STANDARDS | GR.2 | 47E | MAIN MATERIAL 15PIONEER FOR MEC / CEC TO CA/ CMA FINAL Co Salary Alo (Rs 25,000 x 7) Dr. 4,75,000 To Bank Alc 4,76,000 (Salary related to 7 months paid i.e., for the period 1.1.2017 to $1,7.2017) ACSP 3: U.P. Rejya Setu Nigam Ltd. was awarded a contract of construction of a bridge for Rs. 100 Crores on 1-6-2011. Total contract cost estimated was Rs. 80 Crores. The position of the contract on $1-3-2014 and 31-3-2015 was under: - Contract Price 100 Contract cost incurred up to date 26 95 (100% complete) Estimated contract cost of completion 60 Nil While closing 200ks of account on 31-3-2015. tne chie’ accountanl irealed excess cost of Rs.10 Crores incurred as against estimated cost of Rs.25+80= Rs. 85 Crores as on 31-3-2014 as mistakes in estimation of cost, hence classified Rs.10 Crores (95-85) as prior period expenses, Comment on the trealment made by the chief accountant Epgi:| WEHAVE TAKEN THIS PROBLEM FROM 48 E MATERIAL FOR ae BETTER UNDERSTANDING OF CONCEPT. SOLUTION: As per AS 5 ‘Net Profit or Loss for the Period; Prior Period Items and Changes in Accounting Policies’, prior period items’ refers only to income or experises which arise in the current period as a result of errors or omissions in the preparation of ine financié’ sialements of one or more prior periods. Cost estimated by U.P. Rajya Setu Nigam Ltd. in: Rs. 85 Crores Excess Cost incurred in 2014-15 pee Rs. 10 Crores ‘Treatment given by the company Pror pened item Since the increase in the estimated cost is not #‘érror, so cannot be said as prior-period item. This increase in the cost is due to change in estimation which involves judgments based on the latest information available. A change in estimate is neither a prior period item nor an extraordinary item. Hence, the treatment given by the company is not correct. IVISION 6: THEORY FOR SELF STUDY CHANGES IN ACCOUNTING ESTIMATES: For example, Sachin purchased a new machine costing Rs 10 lacs. Useful lite was laken fo be for 10 years; therefore, depreciation was charged at 10% on onginal cost each year. After 5 years when carrying amount was Rs.5 lacs for the machine, management realises thal machine can work for another 2 years only. In this case machine will be depreciated by Rs2.5 lacs each year for next 2 years. This is not an example of prior period iter but change in accounting estimate. In the same example, let us suppose there is no change in useful life of the machine after 5 years. The management by mistake calculated the depreciation in the fifth year as 10% of Rs.6,00,000 i.e, Rs.60,000 instead of Rs.1,00,000 and in the nex: year ie., sixth year decides to charge depreciation of Rs.1,40,000 In Such a case, Rs.1,00,000 would be the depreciation af sixth year and Rs.40,000 depreciation charged by the management in the sixth year will be considered as a prior period item, As per AS 10 (Revised), Property, Plantand Equipment, residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations ciffer from previous estimates, the change should be accounted for 2s a chiange in an accounting estimete in accordance with AS 5 ‘Net Profit 7 Loss for the Period, Prior Pericd Items and Changes in Accounting Pclicies'’ ‘AS~5 | NETPROAT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES | 476 16WWW.MASTERMINDSINDIA.COM | 9885125025 / 26 CONSTRUCTION CONTRACTS LEARNING OBJECTIVES 1) Objective of the Standard 2) Scope & applicability 3), Definition of Construction Contract 4) Types of Construction Contracts 5) Rules for recognition of contract revenue and expenses 6) Application of percentage completion method 7) Contract revenue 8) Contract costs 9) Treatment when the entity expects a loss, 10} Combining & Segmenting 11) Disclosures ‘ANALYSIS OF PAST! ll PAPERS OF CAINTER Computation of percentage of work ‘completed and profit or loss over the perio of contract es (Contract costs to be recognised (Combining and segmenting Treatment when the entity expects a loss on an overall basis Disclosures ILLUSTRATION 1 CRD 10 MigRTP CRO ILLUSTRATION 2 CRD3 M18-MTPI-SM ACSP 1 EXAMPLE 1 rot M185 ASSIGN 10 EXAMPLE 2 CRDS Ni@-RTP CRDS EXAMPLE 3 ACSP 6 NA@NITP ISM ACSP1 EXAMPLE 4 ACSPT NigMTP25m ACSP 4 PRACTICAL QUESTION 9 CRD? MigRTP GRDS PRACTICAL QUESTION 13 CRDS M195 ‘ASSIGN 3, ASSIGN 9 Ni9-RTP. ACSP 3 NiS-MITP-SM ‘ACSP 1 ‘CAINTER | ACCOUNTING STANDARDS | GR.2 | 47EPioneer Fon Mec /cec Toca/cwarivat PPR MZoRTP cRDT 20.5 CROZ NZORTP CRD N20: RITP-5M CROE MZ1RTP a) ASSIGN 5 b) ACSP.2 M21-MTPA-SH GRDE JUL 21-58 ‘ASSIGNS N2L-RTP a)TQ 1b) CRD S N21-MITPI-Si ACEP N24-MITP2-Sit ‘ACSPS CHAPTER OVERVIEW 1 [THEORY FOR CLASSROOM DISCUSSION 2 PROBLEMS FOR CLASSROOM DISCUSSION (CRD) 3 [ASSIGNWENT PROBLEMS (ASSIGN) 4 THEORY QUESTIONS TO) 3 [ADDITIONAL CONCEPTS FOR SELF PRACTICE (ACSP) 6 THEORY FOR SELF STUDY ae [ninsrowrraronrrorcussnoom nsession) 1) OBJECTIVE OF THIS STANDARD: a) Generally, the construction a: periods b) The objective of this standard is to give principles for how 1o allocate total contract revenue & costs, for the accounting periods, and there by finding P/L from a construction contract for a period ities take-a long period and usually fall into cifferent accounting Patties to construction contracts Contracteo Who performs contract ‘Towhom performance is done 2) SCOPE AND APPLICABILITY OF THE STANDARD: a) This standard is not applicable to those enlities who is engaged in construction & sale of properties ‘on its own account, Ex: Construction of Flats / commercial buildings & selling to others, b) This standard is applicable only to contractors and not for contractees. (They may treat it as inventory (AS-2) or PPE (AS~10) or Investment (AS-13} based on their purpose). ‘CONCEPT QUESTION 1(CRD}: A Ltd. fs engaged in the business of constricting flats and sale of such flats fale on individually to sovoral customers. Discuss whother AS - 7 is applicable for A Ltd. or not ‘AS—7| CONSTRUCTION CONTRACTS | 47E | MAIN MATERIAL 2SELLER ae WWW.MASTERMINDSINDIA.COM | 9885125025 / 26 3) DEFINITION OF CONSTRUCTION CONTRACT: Construction contract refers to @ contract for the ‘onstruction of an asset (Example: bridge, building, dam, pipeline, roac, shig, or tunnel) or combination of assets which are closely interrelated or inter dependent in terms of design, technology, function, or utimate purpose (examples of such contracts incluce those for the construction of refineries and other complex pieces of plant or equipment} For the purpose of AS-7, it also includes a) Service contracts which are directly related to the construction of the asset Example: Services o* Project Managers and Architects b) Contract for destruction or restoration of assets and restoration of environment after the destructionidemolition of assets. CONCEPT QUESTION 2(CRD): X Ltd. has got a contract to supply materials for construction of a whether AS-T is applicable for A Ltd or not. ing. Discuss 4) TYPES OF STRUCTION CONTRACTS Fae as ) | Ces Co i Parties agree to Fixed Price or Fixed rate per Unit, | Reimbursement of allowable {defined costs (+) a which, in some cases, subject to Escalation clause percentage of such cost (or fixed foe (Increase) E.a: contractor receives amount spent for ‘construction#4% of amount spent or receives amount ‘spent for construction lakhs E.g: contractor receives Rs 5 crore ater construction of building or he receives Scrore per building constructed 5) RULES FOR RECOGNITION OF CONTRACT REVENUE AND EXPENSES: Rulos for Recognition of Contract Rovenue and Expenses ‘When the Outcome of a Construction Contract can be measured rellably ‘measured rellably "> Contract Revenue should be recognised only to the extent of Contract Costs incurred which could be recovered. = Contract Costs should be recognised as an expense in the period In which they are Incurred, => Any Expected Loss on the Construction Contract should be recognised as an expense immediately. {rren the Outcome of a Construction Contract cannot be +> Contract Revenue & Costs associated with the Construction Contract should be recognised as Revenue & Expenses respectively by using Percentage Completiontiethod. +> Any Expected Loss on the Construction Contract should be recognised as an expense immediately. CONCEPT QUESTION (CRD): 3 Ramana Ltd, accepted a construction contract of a dam for Rs.150 crore on 01-91-2019. The ‘company 80 far has been involved in construction of roads only &doesn't have experience in construction of dams. As on 31-03-2020, the contract costs incurred Rs.10 crore. As this kind of contract is first time for the company & itis al early stage, its not able to estimate total casts and outcome of the company. Determine how much amount af revenue can be recognized by the company for the year ended 31-03-2020? ‘CAINTER | ACCOUNTING STANDARDS | GR.2 | 47E 3