CA (Final)

Financial Reporting

FR CHAPTER: IND as 20,

116
MARKS- 30
Test-4
Question Paper DURATION- 50 MINS

INSTRUCTIONS:

1. All the questions are compulsory.

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every answer sheet.
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 ANSWER ALL QUESTIONS

Question 1

How will you recognize and present the grants received from the Government in the
following cases as per Ind AS 20?
(i) A Ltd. received one acre of land to setup a plant in backward area (fair value
of land Rs. 12 lakh and acquired value by Government is Rs. 8 Iakhs).
(ii) B Ltd. received an amount of loan for setting up a plant at concessional rate
of interest from the Government.
(iii) D Ltd. received an amount of Rs. 25 lakh for immediate start-up of a
business without any condition.
(iv) S Ltd. received Rs. 10 lakh for purchase of machinery costing Rs. 80 lakh.
Useful life of machinery is 10 years. Depreciation on this machinery is to be
charged on straight line basis.
(v) Government gives a grant of Rs. 25 lakh to U Limited for research and
development of medicine for breast cancer, even though similar medicines
are available in the market but are expensive. The company is to ensure by
developing a manufacturing process over a period of two years so that the
cost comes down at least to 50%.
(4 Marks)
Question 2

A Ltd. has been conducting its business activities in backward areas of the country and
due to higher operating costs in such regions, it has collectively incurred huge losses in
previous years. As per a scheme of government announced in March 20X1, the
company will be partially compensated for the losses incurred by it to the extent of Rs.
10,00,00,000, which will be received in October 20X1. The compensation being paid by
the government meets the definition of government grant as per Ind AS 20. Assume
that no other conditions are to be fulfilled by the company to receive the compensation.
When should the grant be recognised in statement of profit and loss? Discuss in light of
relevant Ind AS.
(4 Marks)
Question 3

UK Ltd. has installed Wind Turbine Equipment at Rajasthan to generate electricity for
which it has entered into a Power Purchase Agreement (PPA) with the State
Government. The terms of the PPA are as follows:
- The PPA is for an initial period of 3 years, renewable at mutual terms and conditions.
The Management estimates the useful life of such project around 20 years.
- The price per unit is fixed for a period of one year and is renewed every year as per
the State Government policy.
- The Company's Management is of the view that the power generated by the project
will be completely sold to the State Government and not to any third party. However,
there is no such restriction prescribed in the PPA.
- Currently the Company has classified the Wind Turbine Equipment as part of the
Property, Plant & Equipment and is charging depreciation on the same.

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For the above PPA, which condition, as per the applicable Ind AS, is not relevant in
determining whether an arrangement is or contains a lease?
(A) Use of Specific Assets;
(B) Right to operate the assets;
(C) Right to control the Physical access;
(D) Price is contractually fixed by the purchaser;
UK Ltd. also wants you to give your suggestion on the accounting of the above
arrangement under applicable Ind AS.
(8 Marks)
Question 4

Entity L enters into a lease for 10 years, with a single lease payment payable at the
beginning of each year. The initial lease payment is Rs. 100,000. Lease payments will
increase by the rate of LIBOR each year. At the date of commencement of the lease,
LIBOR is 2 per cent. Assume that the interest rate implicit in the lease is 5 per cent.
How lease liability is initially measured?
(4 Marks)

Question 5

Entity X (lessee) entered into a lease agreement (‘lease agreement’) with Entity Y
(lessor) to lease an entire floor of a shopping mall for a period of 9 years. The annual
lease rent of Rs. 70,000 is payable at year end. To carry out its operations smoothly,
Entity X simultaneously entered into another agreement (‘facilities agreement’) with
Entity Y for using certain other facilities owned by Entity Y such as passenger lifts, DG
sets, power supply infrastructure, parking space etc., which are specifically mentioned
in the agreement, for annual service charges amounting to Rs. 1,00,000.
As per the agreement, the ownership of the facilities shall remain with Entity Y.
Lessee's incremental borrowing rate is 10%.
The facilities agreement clearly specifies that it shall be co-existent and coterminous
with ‘lease agreement’. The facility agreement shall stand terminated automatically on
termination or expiry of ‘lease agreement’.
Entity X has assessed that the stand-alone price of ‘lease agreement’ is Rs. 1, 20,000
per year and stand-alone price of the ‘facilities agreement’ is Rs. 80,000 per year.
Entity X has not elected to apply the practical expedient in paragraph 15 of Ind AS 116
of not to separate non-lease component (s) from lease component(s) and accordingly it
separates non-lease components from lease components.
How will Entity X account for lease liability as at the commencement date?
(10 Marks)

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