FR Concept Book Jai Chawla

CA FINAL
FINANCIAL REPORTING
(By CA. JAI CHAWLA Sir)
INDEX
S.NO TOPIC NAME NO. OF PAGES
1 FINANCIAL INSTRUMENT (INDAS 109, 107 & 32) 71
2 BUSINESS COMBINATION & CONSOLIDATION 100
(INDAS 103 & 110)
3 INDAS 36 – IMPAIRMENT OF ASSETS 26
4 INDAS 33 – EARNINGS PER SHARE 20
5 INDAS 21 – THE EFFECTS OF CHANGES IN FOREIGN 20
EXCHANGE RATE
6 INDAS 19 – EMPLOYEE BENEFITS 14
7 INDAS 12 – INCOME TAXES 28
TOPIC 25
FINANCIAL INSTRUMENTS
INDAS-109, 32 & 107
Quote:
Consistency is what Transforms Average into Excellence
INDAS 109
UNIT – 1
BASIC KNOWLEDGE ABOUT FINANCIAL
INSTRUMENTS
Index
S.No. Topic Name Page No.
1 What is Financial Instrument? 25.3
2 What is Financial Asset? 25.4
3 What is Financial Liability? 25.5
4 What is Equity? 25.6
5 Transactions outside the scope of Fin. 25.9

Instruments
6 Comparison of FA, FL & Equity 25.10
7 Non-Applicability of IndAS 109/32 25.11
25.2
INDAS 109
Before we proceed for in depth discussion we should understand the basic knowledge of some
of the terms, which are as under:
1. WHAT IS FINANCIAL INSTRUMENT?

FI is any contract that gives rise to Financial Assets for One Entity and Financial Liability
or Equity for Another Entity. There can be two types of FI:
1. Primary FI : such as receivables, payables, loans
2. Derivatives FI: such as futures, options, forwards, swaps
25.3
INDAS 109
2. WHAT IS A FINANCIAL ASSET?
A Financial Asset is any asset i.e.
(a) Cash, includes deposits of cash with banks or financial institution
(b) Any Equity instrument of another entity (such as investment in equity shares of another
entity i.e. BHEL, RIL)
(c) A contractual right to receive cash or another financial asset from another entity (such as
trade receivables, loan receivables, bonds receivables)
(d) A contractual right to exchange the financial assets or financial liability with another entity
under the conditions that are favorable to the entity.
(e) A contract that will or may be settled in entity's own equity instruments and is-
A non-derivative for which the entity is or may be obliged to receive a variable number of
entity's own equity instruments; (where shares are used as currency)
(f) Derivative Contracts eg. Futures/Options etc.
ITEMS of ASSETS FA – Yes/No

Building
Receivables
Inventory
Advance Tax
Loan Given
Rent Advance
3 month rent deposit with land lord as security
Advance to Supplier
Intangible Assets
Investment Property
Capital WIP
Investment in Debentures/Bonds
Investment in Gold
Investment in Gold Bonds
Equity Shares held in other company
Right of Use Asset
Cash & Cash Equivalents
Perpetual Debt Intruments eg. Perpetual
Bonds or debentures
Lease Receivable for Lessor
25.4
INDAS 109
3. WHAT IS FINANCIAL LIABILITY?
Financial liability is any liability i.e.
a) A contractual obligation to deliver cash (such as trade payables, loan liabilities) or to
deliver another financial asset to another entity.
b) A contractual obligation to exchange the financial asset or financial liability with another
entity under the conditions which are potentially unfavorable to the entity.
c) A contract that will or may be settled in entity's own equity instruments and is:
A non-derivative for which the entity is or may be obliged to deliver a variable number of
entity's own equity instruments; (a liability which is to be settled in variable no. of own
equity shares, which are used as currency)
d) Derivative Instruments
ITEMS of LIABILITIES FL – Yes/No

Loan Taken
Creditors/Payables
Salary Payable
Credit balance of debtors
Debentures Issued
Provision for Income Tax
Security deposit accepted (refundable)
Contingent Liabilities Eg. Guarantees given
Preference Share capital redeemable
Mandatory
Dividend Proposed
Dividend declared
Financial Guarantee Given
25.5
INDAS 109
4. WHAT IS EQUITY?
(FIX PAYMENT KI KOI OBLIGATION NAI HOTI)
An equity instrument is any contract that evidences a residual interest in the net assets of an
entity after deducting all of its liabilities. Equity Holder can-not claim on the company, if he/she
can claim he is not equity he is someone else.
The most important characteristic of equity instrument is it does not have contractual obligation.
ITEMS Equity – Yes/No

Equity Share Capital
Reserves and Surplus
Redeemable Pref Share Capital
Irredeemable Pref. Shares
100% Compulsorily Convertible Debentures
Convertible Debentures at the option of Holder
Share Warrants
Convertible Debentures at the option of Issuer
Irredeemable Preference shares with
non-cumulative dividend
Irredeemable Preference Shares with Non-cumulative dividend – dividend is payable only when
entity declares dividend on equity shares – it is equity instrument
Equity comprises of:

a) Non-Puttable Equity shares issued by entity (No obligation to redeem)
b) Instruments which are convertible in fixed no. of equity shares (Fixed for Fixed)
c) Puttable instruments subject to fulfillment of certain conditions.
4.1 Settlement in Own Equity Shares of Entity:

Consideration for No. of own equity shares Classification with reason
financial instrument to be issue in settlement
Fixed Fixed Equity – Neither issuer has any
obligation to pay cash nor holder is
exposed to any variability.
It is called Fixed for Fixed Test
Fixed Variable Financial Liability – Issuer has
(equity shares will be obligation to provide variable equity
issue at the fair value shares i.e. equity instruments are being
prevailing at the time of used as currency for settlement
redemption)
25.6
INDAS 109
Variable Fixed Financial Liability – issuer does not have
any obligation to pay cash but holder is
exposed to variability.
Variable Variable Financial Liability – both parties are

exposed to variability and equity shares
are being used as currency.
4.2 Puttable Instruments:

In a simple term – Puttable instrument means redeemable equity shares.
Puttable instrument is a financial instrument that gives the holder-
· The right to put the instrument back to the issuer for cash or another financial asset, or
· Is automatically put back to the issuer on the occurrence of an uncertain future event or the
death or retirement of the instrument holder
Ÿ Put back means redemption. Therefore, puttable instruments are 'financial liabilities'.
Exception – Puttable Instruments are not financial liability but equity instruments if they fulfill all
the following conditions:
1. It entitles the holder to a pro rata share of the entity's net assets in the event of the
entity's liquidation. Providing pro rata share means providing residual interest in the net
assets of any entity. It should be exact pro rata neither lower nor higher.
2. It is sub-ordinate to all other classes of instruments. That means it has no priority over other
claims to the net assets. These instruments are rank last for the repayment in the event of
liquidation.
3. They should have Identical features in the entire class of puttable instruments (See Note
below)
4. Holders of puttable instruments should have no other contractual right to receive cash or
entity's own equity in variable numbers that could satisfy the definition of financial liability.
5. Return on puttable instruments (Expected cash flows attributable to the instruments) should
only be based on - Profit/Loss, change in Net assets and change in the fair value of net
assets and not any other factor other than these three. For example if return is based on index
price then such instrument is not equity. (In short, No Fixed Return)
25.7
INDAS 109
Example 1:
ABC Ltd. has two classes of puttable shares – Class A shares and Class B shares. On liquidation,
Class B shareholders are entitled to a pro rata share of the entity's residual assets up to a
maximum of Rs. 10,000,000.
There is no limit to the rights of the Class A shareholders to share in the residual assets on
liquidation. Examine the nature of the financial instrument.
The cap of Rs. 10,000,000 means that Class B shares do not have entitlement to a pro rata share
of the residual assets of the entity on liquidation. They cannot therefore be classified as
equity.
Note:
In case of puttable instruments, all financial instruments in the most subordinate class have
identical features: For example, they must all be puttable, and the formula or other method
used to calculate the repurchase or redemption price is the same for all instruments in that
class.
Example 2
T Motors Ltd. has issued puttable ordinary shares and puttable 'A' ordinary shares whereby
holders of ordinary shares are entitled to one vote per share whereas holders of 'A' ordinary
shares are not entitled to any voting rights. The holders of two classes of shares are equally
entitled to receive share in net assets upon liquidation. Examine whether the financial
instrument will be classified as equity.
Solution
Neither of the two classes of puttable shares can be classified as equity, as they do not have
identical features due to the difference in voting rights. It is not possible for T Motors Ltd.
to achieve equity classification of the ordinary shares by designating them as being more
subordinate than the 'A' ordinary shares, as this does not reflect the fact that the two
classes of share are equally entitled to share in entity's residual assets on liquidation.
25.8
INDAS 109
5. TRANSACTIONS OUTSIDE THE SCOPE
Sl. No. Particulars Covered Covered under Applicable

under Ind AS 32 Ind AS
Ind AS 109
1 Interest in subsidiaries (At Costs) No No Ind AS 27
2 Interests in associates (At Costs) No No Ind AS 27
3 Interest in joint ventures (At Costs) No No Ind AS 27
4 Rights and obligations under leases No No Ind AS 116
5 Employers' rights and obligations under No No Ind AS 19
employee benefit plans
6 Rights and obligations under an No No Ind AS 104
insurance contract
7 Loan commitment other than covered No No Ind AS 37
under Ind AS 109 and Ind AS 32
8 Shared based payments No No Ind AS 102
9 Reimbursement right in respect of No No Ind AS 37
provision
10 Rights and obligations under revenue No No Ind AS 115
for contracts with customers
25.9
INDAS 109
6. COMPARISON OF FINANCIAL ASSETS, FINANCIAL
LIABILITY AND EQUITY
S. No. Financial Assets Financial liabilities Equity
1 Cash - -
An equity instrument of
2 - -
another entity.
3 A contractual right A contractual No contractual
§ To receive cash or obligation obligation
another financial § To deliver cash or § To deliver cash or
asset from another another financial another financial
entity asset to another asset to another
Or entity entity.
§ To exchange financial Or Or
assets or financial To exchange financial To exchange
liabilities with another assets or financial financial assets or
entity under conditions liabilities with another financial
that are potentially entity under conditions liabilities with
favourable to the entity. that are potentially another entity under
unfavourable to the conditions that are
entity. potentially
unfavourable to the
issuer
4 A contract that will or A contract that will or A contract that will or

may be settled in the may be settled in the may be settled in the
entity's own equity entity's own equity entity's own equity
instruments. instruments including instruments (Fixed for
derivative and non- Fixed criterion met).
derivative (Variable no.
of shares. and Fixed for
Fixed criterion not met).
25.10
INDAS 109
7. NON-APPLICABILITY OF INDAS 109
(I) Exclusion from scope of IndAS 109 although following items may be in the nature of
financial assets and financial liabilities:
1. Share based payments (IndAS 102)
2. Employee Benefits payable (IndAS 19)
3. Rights/Obligations arising under construction contracts (IndAS 115)
4. Contracts of Insurance (IndAS 104)
5. Contracts under Business Combinations (IndAS 103)
6. Contingent Liabilities and Contingent Assets (IndAS 37)
(II) Executory Contracts are outside the scope of IndAS 109:

· Contracts to buy or sell non-financial assets/items for self-consumption are not Financial
Instruments.
· Contracts to buy or sell non-financial assets/items and to be settled net in cash are
financial instruments (Derivative contracts), i.e. contracts without any physical delivery of
Non-Financial items/assets.
· Contracts between the parties where objective is to take quick delivery and quickly resell
it may also be derivative contracts hence they may be financial instruments.
Example 3:
ABC Ltd. enters into a contract to buy 100 tonnes of cocoa beans at 1,000 per tonne for delivery in
12 months. On the settlement date, the market price for cocoa beans is 1,500 per tonne. If the
contract cannot be settled net in cash and this contract is entered for delivery of cocoa beans in
line with ABC Ltd.'s expected purchase/ usage requirements, then own-use exemption applies. In
such case, the contract is considered to be an executory contract outside the scope of Ind AS 109
and hence, shall not be accounted as a derivative.
If the contract can be settled in net cash then it will become Derivative contract and treated as
Financial Asset or Liablity.
25.11
INDAS 109
UNIT – 2
RECOGNITION & MEASUREMENT OF
Index
1 Types of Financial Assets 25.13
2 Initial Recognition 25.18
3 Subsequent Measurement 25.19
4 Modification in Financial Instruments 25.27
5 Miscellaneous Provisions under IndAS 109 & 32 25.34

6 Derecognition of Financial Assets 25.48
25.12
INDAS 109
1. TYPES OF FINACIAL ASSETS
For Recognition and Measurement purpose, IndAS classified the Financial Assets into 3 categories
as under:
1. Financial Assets Classified at “Amortised Cost”
2. Financial Assets Classified at “Fair Value Through OCI”
3. Financial Assets Classified at “Fair Value Through P&L”
1.1 Financial Assets at “Amortised Cost”

Any Financial Asset shall be classified at “Amortised Cost” if it meets both of the following
criteria:
1.Hold-to-collect' business model test – Entity's Objective is to hold the financial asset in
order to collect contractual cash flows (i.e. Hold till Maturity)
AND
2.SPPI' contractual cash flow characteristics test - Contractual terms give rise to cash
flows that are Solely Payments of Principal and Interest (SPPI) on the principal amount
outstanding.
Examples of Financial assets classified & accounted for at Amortised Cost:

Ø Trade Receivables
Ø Investments in Government Bonds (not held for trading)
Ø Investments in Term Deposits (at standard interest rates)
Ø Loan receivables with 'basic' features
Ø Debentures redeemable in Cash
Ø Staff Advances
Note: In Simple words, we can understand that to classify under Amortised Cost
following 3 conditions must be satisfied:
· If the business model is such that the objective is to hold such asset till maturity date and
earn contractual cash flows entirely.
· Such asset can generate INTEREST INCOME only on the instruments. (i.e. not able to sale
and earn other income like capital gain)
Ÿ And the instrument generates cash flows only from INTEREST & PRINCIPAL on
SPECIFIED DATES.
Note:
1. Investment in Equity Instrument can never be classified at amortized cost.
2. INSTRUMENT THAT PAYS AN INVERSE FLOATING INTEREST RATE (i.e. the interest
rate has an inverse relationship to market interest rate) – These do not represent contractual
cash flows that are solely the payments of principal and interest on the principal amount
outstanding.
25.13
INDAS 109
1.2 Financial Assets at “Fair Value through OCI”
Any Financial Asset shall be classified at “FVTOCI” if it meets both of the following criteria:
1.Hold-to-collect and sell' business model test - Objective is achieved by both holding
the financial asset in order to collect contractual cash flows and selling the financial asset i.e.
Intention of the entity is to sell the instrument before the investment matures.
AND
2. 'SPPI' contractual cash flow characteristics test - Contractual terms give rise to
cash flows that are Solely Payments of Principal and Interest (SPPI) on the principal amount
outstanding.
Examples of FA classified and accounted for at FVOCI:

Ø Investments in government bonds where the investment period is likely to be shorter than
its maturity period.
Ø Investments in corporate bonds where the investment period is likely to be shorter than its
maturity period.
Note: In Simple words, we can understand that to classify under FVTOCI
following 3 conditions must be satisfied:
· If the business model of an entity is such that the objective is not to hold till maturity
date but to sell such instruments in the market or having no maturity;
· Such Asset can generate INTEREST as well as OTHER INCOME (such as capital gain)
from the sale of instrument;
Ÿ And the instrument generates PRINCIPAL& INTEREST on SPECIFIED DATES.
1.3 Financial Assets at “Fair Value through Profit & Loss”

1. This is a residual category and the financial assets falls under this category are generally
those assets whose contractual cash flows are not fixed and they does not generate cash flows
on specified dates such as Investments in equity shares of other companies.
2. Financial asset (FA) classified and measured at FVTPL if FA is:

Ø A held-for-trading financial asset
Ø A debt instrument that does not qualify to be measured at amortised cost or FVOCI
Ø An equity investment which the entity has not elected to classify as at FVOCI
Examples of Financial assets classified and accounted for at FVTPL:

1. Derivatives that have not been designated in a hedging relationship, e.g.:
- Interest rate swaps
- Commodity futures/option contracts
- Foreign exchange futures/option contracts
2. Investments in shares where the entity has not elected to account for at FVTOCI
25.14
INDAS 109
Fiancial Assets
Fair Value through Fair Value through

Amortized Cost
other comprehensive profit or loss (FVTPL)
income (FVTOCI)
Business Model SPPI or Held for Residual

Test - To collect Contractual Business Model SPPI or trading Category
cash Flow test Test Contractual
To collect and cash flow test
To sell
1.4 Exception for Some Equity Instruments
1. Equity Instruments are generally Held for Trading and hence they are always measured at Fair
Value through Profit and Loss.
2. However if equity instruments are not held for Trading then there is an option that Equity
instruments (not held for trading) may be designated as FVTOCI.
3. Is Equity Instrument (FA) held for trading? If Yes:-then FVTPL always.
If No:- there is an option to designate it to FVTOCI instead of FVTPL (it means holder may opt
to categorize under FVTOCI)
4. If the option of FVTOCI is selected for equity shares not held for trading, then any resulting
gain/loss on REVALUATION (subsequent recognition due to fair value changes) will be
transferred to OCI while dividends are recognised in Profit and Loss.
5. On disposal of the investment the cumulative change in fair value is required to remain in OCI
and is not recycled to profit or loss. However, entities have the ability to transfer amounts
between reserves within equity (i.e. between the FVTOCI reserve and Retained Earnings).
6. This option is IRREVOCABLE.
Example 4:
Year 1 Beginning. Purchased 200 No. of Equity shares of Reliance @2,500/- (Fair Value)
Trans. Cost Outflow = 1,000/-
These are not HFT. Hence, designated under FVTOCI
Journal Entry
Investment in Equity (R) A/c Dr. 5,01,000
To Bank A/c 5,01,000
Year 1 End:
Market Price becomes 2,610/-
Remeasured @2160 x 200 i.e., 5,22,000
25.15
INDAS 109
Investment in Equity (R) A/c Dr. 21,000
To FV Gain A/c (OCI) 21,000
SPL (Extract)
Other Comp. Income: -
1) Items that will not be reclassified to P&L: -
FV Gain on Reliance 21,000
SOCIE (Extract)
Reserves & Surplus Equity investment through OCI
CR SP Other R/E FV Reserves
OCI During the year - - - - 21,000
Year 2 End: Market Price = 2,580/-

Remeasured @2,580 x 200 = 5,16,000
FV Loss (OCI) Dr. 6,000
To Investment in Equity ® A 6,000
SPL (Extract)
Items that will not be reclassified to P&L: -
FV Loss (6,000)
SOCIE (Extract)
Equity through OCI
Opening Balance / Restated 21,000
OCI for the Year (6,000)
Balance at the end 15,000
Year 3: Shares Sold @2,600/-
Bank A/c Dr. 5,20,000

To Investment A/c 5,16,000
To Gain on Sale A/c (OCI) 4,000
SPL (Extract)
Items that will not be reclassified to P&L: -
Gain on Sale (4,000)
25.16
INDAS 109
SOCIE (Extract)
Reserves & Surplus FV Reserve
Opening Balance GR/RIE 15,000
OCI for the year 4,000
Transfer to GR/R&S 19,000 (19,000)
OCI A/c (CY) Dr. 4,000

FV Reserve A/c Dr. 15,000
To GR A/c 19,000
25.17
INDAS 109
2. INITIAL RECOGNITION
Initial Recognition depends on the type of Financial Asset or Financial Liability. Let's have a look
briefly:
1. FINANCIAL ASSETS – Initial Recognition

(a) Amortised Cost – at Present Value of Cash Flows (at Effective rate of Interest i.e. ERI) +/-
Transaction Cost
(b) Fair Value through OCI (FVTOCI) – at Fair Value +/- Transaction Cost
(c) Fair Value through P&L (FVTPL) – at Fair value (Transaction cost is to be charged to P&L a/c
directly)
2. FINANCIAL LIABILITIES – Initial Recognition

(a) Amortised Cost – at Present Value of Cash Flows (at ERI) +/- Transaction Cost
(b) Fair Value through P&L (FVTPL) – at Fair value (Transaction cost is to be charged to
P&L a/c directly)
3. EQUITY:
Since it is a residual interest in the net assets of the company therefore it is recognised at
Residual Value not fair value.
25.18
INDAS 109
3. SUBSEQUENT MEASUREMENT (at B/S Date)
Subsequent measurement means – Measurement at Balance Sheet Date (Reporting date)
3.1 Subsequent Measurement - Financial Assets

(a) Financial assets measured at Amortised Cost
1. Income shall be recorded in the profit and loss statement always.
2. At Balance sheet date such Financial Asset is required to be measured at Present value of
agreed contractual cash flows calculated using “Effective Rate of Interest” (also known as
IRR)
(b) Financial assets measured at Fair Value through OCI (FVTOCI)

1. Regular (specified) Income like interest or dividend received shall be recorded in the profit
and loss statement always.
2. At Balance sheet date such Financial Asset is required to be measured at Fair Value (market
value) and any changes in carrying amount due to fair value measurement will be accumulated
in OCI. (since it is unrealized gain or loss)
3. On De-recognition of FA under this category, accumulated balance in OCI in respect of such
FA shall be reclassify (transfer) to P&L a/c. (it means it becomes realised gain/loss) except
in case of Equity Investments not held for trading and designated as FVTOCI.
(c) Financial assets measured at Fair Value through P&L (FVTPL)

1. Regular Income shall be recorded in the profit and loss statement always.
2. At Balance sheet date such Financial Asset is required to be measured at Fair Value (market
value) and any changes in carrying amount due to fair valuation will be recognised in P&L A/c.
Example 5: We bought share of Infosys Ltd. at Rs.2100. Transaction cost is Rs.2. On quarter end
FV of shares is Rs.2250. These shares are designated as FVTPL (held for trading)
Answer:
Day-1
Investment in shares Dr. 2100
Transaction cost (P&L) Dr. 2
To Bank A/c 2102
Quarter end –
To Fair value gain (P&L) 150
Now suppose if we sell these shares at Rs.2500 and transaction cost is Rs.3
25.19
INDAS 109
Bank Dr. 2500
To investment in shares A/c 2250
To P&L (Gain) A/c 250
Transaction Cost (P&L) A/c 3

To Bank A/c 3
-
Example 6: We bought shares of Infosys at Rs.2100. Transaction cost is Rs.2. On quarter end FV
of shares is Rs.2250. These shares are designated as FVTOCI, not held for trading.
Answer:
Day-1 Investment in shares Dr. 2102
To Bank A/c 2102
Quarter end –
To OCI 148
Now suppose if we sell these shares at Rs.2500 and transaction cost is Rs.3
Bank Dr. 2497
To investment in shares A/c 2250
To OCI A/c 247
Example 7
A Ltd. has made a security deposit whose details are described below. Make necessary journal
entries for accounting of the deposit. Assume market interest rate for a deposit for similar period
to be 12% per annum.
Particulars Details
Date of Security Deposit (Starting date) 1/4/X1
Date of Security deposit (finishing date) 31/03/X6
Description Leases
Total Lease Period 5
Discount Rate 12%
Security Deposit (A) 10,00,000
25.20
INDAS 109
Solution:
The above security deposit is an interest free deposit redeemable at the end of lease term for
Rs. 1000000. Hence this involves collection of contractual cash flows at specified date and not
able to sale in the market hence will be categorized under “Amortised Cost”.
Journal Entry:
At beg. FA (Security Deposit) A/c Dr. 5,67,427
Prepaid Lease Exp A/c Dr. 4,32,573
To Bank A/c 10,00,000
At the end of 1st Year:

Security deposit A/c Dr. 68,091
To Interest Income A/c 68,091
Prepaid lease expense shall be amortised over the life of lease term on SLM basis unless any
other approach is reasonable.
Rent Expense A/c Dr. 86,515
To Prepaid Expense A/c 86,515
Financial Assets (Amortised Cost) - Staff Advances

· If the entity provides Staff advances without interest or at concessional interest rates, then
such advances should be recognized by applying effective interest rate (Amortised cost
method).
· If staff advance exceeds the present value of expected cash inflows, then excess is called
Employee Compensation‟.
Ÿ Employee Compensation should be written off over the period of expected benefits. If the
ratio of expected benefits are not identifiable then employee compensation should be
written off to the statement of profit and loss at inception.
25.21
INDAS 109
Example 8 - Staff Advance at Concessional Interest: - (Under AMC)
Loan Given to Mansi (Employee) by its employer Entity Rs. 15,00,000 @6% P.a. Market interest
Rate is 9% P.a. Repayment terms are: -
Equal Principal Installment in 5 Years + Interest on Outstanding Balance.
Solution:
Staff Loan Shall be Categorized Under AMC.
Initial Recognition @PV of CCF @9%
Year CCF PV &9%

1 3,90,000
2 3,72,000
3 3,54,000
4 3,36,000
5 3,18,000
13,88,965
Beginning of Loan:
Books of Employer Entity
Loan
L otoa Staff
n t(FA)
o S t a f f ( F Dr.A ) 13,88,965
13,88,965
Employee
Dr. Benefits Expenses A/c* Dr. 1,11,035
1,11,035
Employee Benefits
To Bank A/c
Expenses A/c* 15,00,000
15,00,000
*Either D&A or Directly Transfer to P&L A/c

Loan To Staff A/c
Particular Amount (Rs.) Particular Amount (Rs.)

To Bank A/c 13,88,965 By Bank A/c 3,90,000
To Interest @9% 1,25,007 By Balance c/d 11,23,972
15,13,972 15,13,972
Example 9: -
Assume Same Example Above. But Repayment Terms are:
Equal (Principal + Interest) Installments.
Solution:
Equal Installments (P+I) = 15,00,000 / Annuity Factor* at 6%
= 15,00,000 / 4.212
= 3,56,095
FA = P of 3,56,095 @9% for 5 Years = 13,85,085/-

*Annuity Factor is At Contractual Rate Not True Rate (Accounting will be at True Rate Only)
25.22
INDAS 109
Loan to Staff A/c
To Interest @8% 69,709 By Balance c/d 7,41,089
9,41,089 9,41,089
To Balance B/d 7,41,089
To Interest @8% 59,287
3.2 Subsequent Measurment - Financial Liability

(a) Amortised Cost
Accounting treatment of financial liability which can be measured at amortised cost:
· For the purpose of accounting, we need EFFECTIVE INTEREST RATE (i.e. IRR) for the
financial liability measured at amortised cost.
· The effective interest rate will be given in the question or we need to calculate interest by
interpolation technique.
TYPES OF FINANCIAL LIABILITY UNDER AMORTISED COST:

· Compound FI
· Non compound FI
AMORTISED COST - COMPOUND FINANCIAL INSTRUMENTS

Compound Financial Instruments are those instruments which are having features of both equity
as well as financial liability. Apply following steps for accounting:
Step 1: Calculate Financial Liability Component: Present value at ERI of All Contractual
Cash Flows to be discharged.
Step 2: Calculate Residual Equity Component: Total Proceeds – Fin. Liab. Component as per
Step 1
Example 10:
Debentures are redeemable at the end of 10 years from the date of issue. Interest of 15% p.a.
is payable at the discretion of the issuer. The rate of interest is commensurate with the credit
risk profile of the issuer.
This instrument has two components – (1) mandatory redemption by the issuer for a fixed
amount at a fixed future date, and (2) interest payable at the discretion of the issuer.
The first component is contractual obligation to deliver cash (for repayment of principal with or
without premium, as per terms) to the debenture holder that cannot be avoided. This component
of the instrument is a financial liability.
The second component of interest payable is at discretion of the issuer and hence will be
classified as equity.
25.23
INDAS 109
Example 11: -
Kamal Ltd. issued Convertible Debentures (FV = 100) 50,000 No. @8% Interest P.a. for 5 Years.
Debentures are Convertible at the option of Holder after 5 Years.
Same Debentures (With no Conversion Rights) could have been issued at a market rate of 11% P.a.
Year CCF PV & 11%

1 4,00,000
2 4,00,000
3 4,00,000
4 4,00,000
5 4,00,000
5 50,00,000*
PV of CCF 44,45,615
*If Holder opts for Cash Equity, cannot deny.

Total Proceeds at Beginning = 50,00,000
PV of CCF (FL) = 44,45,615
Balance Equity = 5,54,385 (SOCIE under “Equity Component of Comp. FI”)
Beginning:
Bank A/c Dr. 50,00,000
To 8% Convertible Debentures A/c (FL) 44,45,615
To 8% Convertible Debentures A/c (Eq) 5,54,385
8% Convertible Debentures (FL) A/c

To Balance C/d 45,34,633 By Interest Exp A/c 4,89,018
49,34,633 49,34,633
50,33,442 50,33,442
51,43,121 51,43,121
52,64,864 52,64,864
54,00,000 54,00,000
25.24
INDAS 109
Case 1: Holder opts for Cash Payment:
8% Convertible Debenture (FL) A/c Dr. 50,00,000

To Bank A/c 50,00,000
5,54,385
8% Convertible Debenture (EQ) A/c 5,54,385
Case 2: Holder opts for Equity Conversion:
8% Convertible Debenture (FL) A/c Dr. 50,00,000

To 8% Convertible Debenture (EQ) A/c 50,00,000
Now Equity Balance is 55,54,385
Suppose entity issued 1,00,000 No. of 10/- each.

8% Convertible Debenture (EQ) A/c Dr. 55,54,385
To Equity Share Capital A/c 10,00,000
To SP Reserve A/c 45,54,385
AMORTISED COST - NON - COMPOUND FINANCIAL INSTRUMENTS

Non-Compound financial Instruments means which are pure Financial Liability and contains zero
Equity component. These instruments required Effective rate of interest for accounting purpose.
If ERI is not given we need to calculate the ERI. Do not consider Contractual Rate for accounting.
(b) Fair Value through Profit and Loss (FVTPL):

Financial liability are measured at FVTPL when they are held for trading. A financial liability is held
for trading when it is acquired or incurred principally for the purpose of selling or repurchasing it in
the near term or when it is a derivative. (except a derivative of hedging in the nature of Cash Flow)
25.25
INDAS 109
Example 12: (Non-Compound Financial Instrument)
Kamal Ltd. issued 9% Bonds (20,000 No. of 100/- FV) @10% Discount. Interest is repayable
annually. Principle after 4 Years in cash with 12% Premium. How to Account for this financial
instrument.
Solution
Initial Proceeds = 18,00,000
Year CCF
1 1,80,000
2 1,80,000
3 1,80,000
4 1,80,000
4 22,40,000
1st Rate 14% = Sum of PC of CCF = 18,50,728

2nd Rate 15% = Sum of PC of CCF = 17,94,623
Increase in % 1 ?
14% +
Decrease in Rs. 56105 50728
Hence ERI = 14.904%
Journal Entry in Beginning:-

Bank A/c Dr. 18,00,000
To 9% Bonds (FL) A/c 18,00,000
9% Bonds (FL) A/c

20,68,272 20,68,272
21,69,700 21,69,700
22,86,245 22,86,245
24,20,000 24,20,000
25.26
INDAS 109
4. MODIFICATION IN FINANCIAL INSTRUMENTS
4.1 MODIFICATION IN COMPOUND INSTRUMENT
Modification may arise due to – Change in ERI, Change in Service Period, Change in repayment terms
like contractual interest rate or principle repayment or change in Fair value of instruments.
Following steps are to be followed:
Step 1 – Determine the carrying values of Financial Assets/Liability and Equity as on Modification
date.
Step 2 – Calculate Revised values of FA/FL and Equity on modification as per revised terms such as
revised period, revised CCF or revised contractual rate of interest. Revised values shall be
calculated using original discount rate or revised discount rate given if any.
Step 3 – Difference between Revised values of FA/FL/Equity and Carrying values of the same shall
be treated as under –
Difference in FA/FL shall be transferred to Profit and Loss a/c (Gain or Loss)
Difference in Equity shall be transferred to Other Equity (SOCE)
Step 4 – Settle the amount of FL or Equity as per the question's requirement if any or continue
with the same and calculate the finance costs for further years.
4.2 EXTINGUISHMENT/MODIFICATION OF FINANCIAL LIABILITY

(NON-COMPOUND INSTRUMENT):
(a) Extinguishment of Financial Liability means – Cancellation of Original Debt by re-
negotiating the terms with existing lender with new terms and new debt. It is also known as
Strategic Debt Restructuring.
(b) Modification of Financial Liability means – Modifying the existing debt/loan with some new
terms without cancelling the existing debt.
First of all we need to identify whether the change in terms of debt/loan is an Extinguishment or
Modification. Since the accounting is different for both under INDAS 109.
For this purpose we should perform following test:

1. Calculate the Revised Present Value of the Liability as per revised terms (such as New
Contractual cash flows) using original ERI
2. Compare the above Revised PV of Liability with Carrying Value of Liability appearing in the
books.
3. If difference in both of the values is 10% or more then we will consider this revision as
“Extinguishment of Financial Liability”.
25.27
INDAS 109
4. If difference in both of the values is less than 10% then we will consider this revision as
“Modification of Financial Liability”.
Extinguishment Accounting:
1. De-recognise the Existing Carrying amount of Financial Liability.
2. Recognise New/Modified Financial Liability at Fair Value (net of any fees incurred) using
Revised ERI given in the question.
3. If Revised ERI is not given then recognise the new/modified liability at the Outstanding
amount payable on the date of revision and calculate the ERI to be used in future for
recording finance cost of every year.
4. Difference of Carrying amount (which is de-recognised) and New/Modified Financial
liability (which is recognised) is transfer to Profit and Loss immediately as Gain or Loss on
Extinguishment.
Modification Accounting:
1. No need to de-recognise the existing carrying amount of Financial Liability.
2. Just make the changes in the same carrying amount of Financial Liability.
3. Apply any one of following two approaches:
Approach 1 Approach 2
1. Increase/Decrease the existing 1. Deduct the Fees/Cost of modification
carrying value of Financial Liability from the existing carrying amount of
by calculating the Revised Present financial liability.
Value based on revised terms of 2. Recalculate the ERI. This is the rate
payment using original ERI and which discounts the future cash
difference is recognise in Profit and flows to the adjusted carrying
Loss A/c. amount after deduction of above
2. Any fees/cost of modification fees/cost.
charge to Profit and Loss A/c. 3. Future annual finance cost shall be
determined using above Revised ERI.
Note: Approach 2 is more preferable.
4.3 MODIFICATION IN FINANCIAL ASSET (STAFF ADVANCES):

Increase/Decrease the existing carrying value of Financial Asset by calculating the Revised
Present Value based on revised terms of payment using REVISED ERI if given, otherwise Original
ERI and difference is adjusted with un-amortised employee cost if any otherwise directly transfer
to Profit and Loss A/c.
25.28
INDAS 109
Example 14: -
Loan taken of Rs. 50,00,000 @ Contractual Rate = 12% p.a.
Term is 5 Years
Repayment Terms: -
(i) Processing fees at Beginning = 2,00,000
(ii) Equal (P+I) Installment at end every year
At the beginning of 3rd Year: -
Borrower entity approached Bank & requested for restructuring, as per new terms
(i) Remaining repayment period = 4 years
(ii) Now revised CCF would be 12,50,000/- annually
(iii) Modification fee immediately = 50,000/-
(iv) Same loan with similar terms could have been arranged @13% Market Rate.
Solution (All figures are after considering 12 digits)
Annual Repayment = 50,00,000 / 3.605 = 13,87,049
(i) Initial Proceeds = 48,00,000

(ii)
Year CCF
1 13,87,049
2 13,87,049
3 13,87,049
4 13,87,049
5 13,87,049
(iii) We need to calculate ERI at which sum of PV of CCF should be equal to 48,00,000/-
(iv) At 12% PV is 50,00,000
At 14% PV is 47,61,851
12% + 2% ?
Increase in %
Decrease in ₹2,38,149 2,00,000
12% + 1.68% = 13.68%

(v)Amortisation Schedule: -
Year Opening O/s Interest @13.68% installment Closing O/s
1 48,00,000 6,56,640 (13,87,049) 40,69,591
2 40,69,591 5,56,720 (13,87,049) 32,39,262
Carrying Amount of Loan at Modification Date = 32,39,262

Check 10% Test: -
1) PV of Revised CCF (12,50,000 p.a. for 4 years & 50,000 fees) @ Original ERI = 13.68%
25.29
INDAS 109
Year CCF
0 50,000
1 12,50,000
2 12,50,000
3 12,50,000
4 12,50,000
Revised PV = 37,16,163
2) Difference between Current CA and Revised PV = 4,76,901
% of Change = 4,76,901 / 32,39,262 x 100 = 14.72%
3) Conclusion: Follow Extinguishment A/c
4) Treatment of Extinguishment A/c
a) Derecognize old Loan @12% i.e., 32,39,262
b) **Recognize New 13% Loan at PV of new CCF @13% i.e., 37,68,089
c) Difference transfer to P&L i.e., 5,28,827**
Year CCF
0 50,000
1 12,50,000
2 12,50,000
3 12,50,000
4 12,50,000
PV @13% = 37,68,089
Modification Entry: - 12%
12% Loan A/c Dr. 32,39,262
Loss on Modification A/c Dr. 5,28,827
To 13% Loan A/c 37,68,089
Profit & Loss A/c Dr. 5,28,827

To Loss A/c 5,28,827
Further Accounting:
13% Loan A/c
To Bank A/c (Fee) 50,000 By 12% Loan A/c 32,39,262
By Loss A/c 5,28,827
To Bank A/c 12,50,000 By Interest @13% 4,83,352
To Balance C/d 29,51,441
42,51,441 42,51,441
25.30
INDAS 109
Example 15: -
Loan Taken 50,00,000 @10% Interest. Term is 4 years
Repayment Terms:
1) Equal Principal only & Interest Extra.
2) No other charges. Therefore, ERI is also same i.e., 10%
First Year repayment on Time
On Second Year Default in Payment of Principal only Interest is paid
Beginning of 3rd Year: Bank agrees to make following Modifications:
(i) Outstanding Loan of 37,50,000 now to be repaid in 5 Years in equal Principal
(ii) Interest to be paid @same 10% Rate. (Assume now it is not a market Rate)
Apply Extinguishment A/c (ignore 10% Test)
(iii) Fees of Modification paid = 1,00,000
Solution:
Step 1:
Current Carrying Value immediately before Modification = 37,50,000
Step 2: (Extinguishment A/c)

Revised ERI is not given
Calculate New WRI at Which
Sum of PV of New Terms is equal to Current Outstanding Amount (i.e., 37,50,000)
Year CCF
0 1,00,000
1 11,25,000 (7,50,000 + 3,75,000)
2 10,50,000 (7,50,000 + 3,00,000)
3 9,75,000 (7,50,000 + 2,25,000)
4 9,00,000 (7,50,000 + 1,50,000)
5 8,25,000 (7,50,000 + 75,000)
By Interpolation (Trail & Error) method new ERI would be 11.13%
Example 16: Staff Advance Modification

Loan given to employee Rs. 12,00,000 @5% p.a. Principal repayment lumpsum at end of 5th Year.
Market Rate = 9%
Solution:
Initial Recognition
Year CCF
1 60,000
2 60,000
3 60,000
4 60,000
5 12,60,000
25.31
INDAS 109
PV @9% = 10,13,297
Initial Entry:
Loan to Staff (FA) A/c Dr. 10,13,297
Employee Compensation Expense A/c* Dr. 1,86,703
To Bank A/c 12,00,000
Ÿ *It is to be Deferred & Amortised SLM in 5 Years

Ÿ Finance Income @9% shall be booked.
At the Beginning of 3rd Year. Changes in Repayment Schedule as under for remaining
Outstanding: -
He need to pay 2,50,000 p.a. in next 5 years.
Revised market rate = 10% p.a.
Sum of PV of 2,50,00 p.a. @10% p.a. for 5 Years i.e., 9,47,697/-
Carrying Amount at the Beginning of 3rd Year.

Year Opening O/s Amt Interest Actual Repayment Closing Balance
1 10,13,297 91,197 (60,000) 10,44,494
2 10,44,494 94,004 (60,000) 10,78,498
Remaining Unamortised Balance of Employee Compensation A/c = 1,86,703 / 5 x 3 = 1,12,022/- ‘

(Dr. Balance)
Change in Financial Asset: Revised PV 9,47,697
CA 10,78,498
Decrease in FA 1,30,801
Beginning of 3rd Year.
Loss A/c Dr. 1,30,801
To Staff Loan A/c 1,30,801
Employee Compensation Expenses A/c Dr. 1,30,801
To Loss A/c 1,30,801
Revised Unamortised Balance of Employee Compensation = 1,12,022 + 1,30,801 = 2,42,823*

* Deferred & Amortised in Next 5 Year SLM
Staff Loan A/c (FA)

To Balance B/d 10,78,498 By Loss A/c 1,30,801
To FI @10% on 94,770 By Bank A/c 2,50,000
9,47,697 By Balance c/d 7,92,467
11,73,268 11,73,268
25.32
INDAS 109
5. MISCELLANEOUS PROVISIONS
(A) Financial Guarantee Contracts & Commitments: -
1) Amount Borrowed by one company at a Concessional rate only if guarantee given by third
party.
Example: Market Rate = 12% p.a.
Concessional Rate due to Guarantee = 9% P.a.
2) Guarantor has to recognise F/L in its books due to the risk taken on behalf of Borrower.
“Financial Guarantee (Liabilities) A/c”
3) Above Financial Liability shall be recognised at a minimum amount to be paid which is the
benefit of interest accrued to borrower
Initial Measurement of Financial Liabilities A/c should be as follows: -
Sum of PV of (CCF with guarantee – CCF without guarantee)
Example 17: -
Loan Amount is 50,00,000 @9% p.a. with guarantee
Market rate is 12% p.a. without guarantee term = 4 years
Principal Repayment in 4th Year guarantor has charged 1,00,000 for this service
Solution:
Year CCF @12% CCF @9% Difference
1 6,00,000 4,50,000 1,50,000
2 6,00,000 4,50,000 1,50,000
3 6,00,000 4,50,000 1,50,000
4 56,00,000 54,50,000 1,50,000
Sum of PV of 1,50,000 p.a. for 4 years @12% p.a. is 4,55,602

Books of Guarantor
Bank A/c Dr. 1,00,000
Investment*/P&L A/c Dr. 3,55,602
To Financial Guarantee (Liabilities) A/c 4,55,602
*If Guarantor is a Parent Company

Financial Guarantee (Liabilities) A/c (AMC)

To Profit & Loss A/c 1,50,000 By Bank / P&L A/c 4,55,602
To Balance C/d 3,60,274 (a) By Interest Cost A/c 54,672
5,10,274 5,10,274
There is a 5% Probability of Default

Expected Loss = 50,00,000 x 5% = 2,50,000 (b)
25.34
INDAS 109
Remeasurement of Financial Guarantee (Liability) at Higher of: -
(a) 3,60,274
Or
(b) Expected Loss i.e., 2,50,000
Financial Liability need not be re-measured as it is already been shown at Higher amount of
3,60,274 which is more than expected loss due to default.
(B) TRADE DATE ACCOUNTING VS. SETTLEMENT DATE ACCOUNTING

1. Entity may choose either Trade date accounting or Settlement date accounting for
Financial Instruments.
2. Trade date accounting – FA/FL shall be recorded on agreement date itself although the
transaction is yet to be settled in future.
3. Settlement date accounting – FA/FL shall be recorded on final settlement date only and
ignoring trade date.
4. On Balance sheet date, while measuring asset/liability at fair value –
Trade date accounting – FA/FL shall be increased/decreased accordingly
Settlement date accounting – Changes in Fair value of FA/FL shall be recorded only without
recording any FA/FL
5. The most important thing to understand is whether we are following Trade date accounting
or settlement date accounting, FA/FL shall be shown at Fair Value on Settlement date.
(C) TREASURY SHARES – (BUYBACK OF EQUITY SHARES)

If an entity reacquires its own equity instruments:
Ø Consideration paid for those instruments ('treasury shares') shall be deducted from
equity. An entity's own equity instruments are not recognised as a financial asset
regardless of the reason for which they are reacquired.
Ø Consideration paid shall be recognised directly in equity.
Ø No gain or loss shall be recognised in profit or loss on the purchase, sale, issue or
cancellation of an entity's own equity instruments
(D) BUYBACK OPTION OR WRITTEN PUT OPTION OR OBLIGATION TO PURCHASE

OWN EQUITY:
· Such contracts are puttable instruments and are treated as Financial Liability.
· If an entity announces written put option for such instrument which was earlier classified
under equity, then this will rise to reclassification from equity to financial liability at PV of
redemption amount.
· Any option premium collected by entity on written put option shall be directly recognised in
equity not in P&L a/c
· At the time of exercise of option by holder the financial liability is paid off if the option is
exercised otherwise it is again reclassified to equity if option is not exercised.
25.35
INDAS 109
Following journal entries may be passed:
(a) On receipt of option premium:
Bank a/c Dr.
To Option premium (Equity) a/c
(b) On transfer of equity to financial liability on the date of option agreement
Equity a/c Dr.
To Financial Liability a/c (Re-measurement)
(c) On recognition of Interest/Finance charges every year on above financial liability
Interest (P&L) a/c Dr.
To Financial Liability a/c
(d) On Settlement date:
If option is exercised –
Financial Liability a/c Dr.
To Bank a/c
If option is not exercised –
Financial Liability a/c Dr.
To Equity a/c
(E) RECLASSIFICATION FROM EQUITY TO FL OR FL TO EQUITY

If an entity redeems all its issued non-puttable instruments and any puttable instrument that
remain outstanding have all the features and meet all the conditions mentioned above, the entity
shall reclassify the puttable instruments as equity instruments from the date when it redeems the
non-puttable instruments.
Reclassification From Reclassification to Measurement Recognition of Diff. in

CA & Measurement of
instrument
Financial Liability Equity Same amount (i.e. NA
Carrying value on the (holder avails the option
date of reclassification) of conversion into equity)
Equity Financial Liability Fair Value at the In Equity
date of reclassification (not in Profit and
(eg. PV of CCF at ERI Loss account)
in case of (eg. Buyback option)
Amortised Cost)
25.36
INDAS 109
(F) RECLASSIFICATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Reclassification of Financial Liability is not allowed. Reclassification of Financial Assets is possible
only when entity changes its Business Model:
Case 1: AMORTISED COST TO FVTPL - It is measured at fair value on reclassification date.

- Any gain or loss arising from difference between the previous amortised cost of the
financial asset and fair value is recognised in profit or loss.
Example 18:
Bonds for Rs 1,00,000 reclassified as FVTPL. Fair value on reclassification is Rs 90,000. Pass the
required journal entry.
Solution
Particulars Amount Amount
Bonds at FVTPL Dr. 90,000
Loss on reclassification Dr. 10,000
To Bonds at am ortised cost 1,00,000
Case 2: AMORTISED COST TO FVOCI - It is measured at fair value on reclassification date.
financial asset and fair value is recognised in other comprehensive income
- Effective interest rate and measurement of expected credit losses are not adjusted as a
result of reclassification.
Example 19:
Bonds for Rs 1,00,000 reclassified as FVOCI. Fair value on reclassification is Rs 90,000. Pass the
Solution

Bonds at FVOCI Dr. 90,000
OCI (Loss on reclassification) Dr. 10,000
To Bonds at am ortised cost 1,00,000
Case 3: FVTPL TO AMORTISED COST

- It is measured at fair value on reclassification date and this fair value becomes the new
gross carrying amount. Effective interest rate is computed based on this new gross carrying
amount.
financial asset and fair value is recognised in profit or loss.
Example 20:
Bonds for Rs 100,000 reclassified as Amortised cost. Fair value on reclassification is Rs 90,000.
Pass the required journal entry.
25.37
INDAS 109
Solution
Bonds at Amortised cost Dr. 90,000
To Bonds at FVTPL 1,00,000
Case 4: FVTPL to FVOCI

- The financial asset continues to be measured at fair value.
Example 21:
Bonds for Rs 100,000 reclassified as FVOCI. Fair value on reclassification is Rs 90,000. Pass the
Solution
Bonds at FVOCL Dr. 90,000
To Bonds at FVTPL 1,00,000
Case 5: FVOCI TO AM ORTISED COST

- The financial asset is measured at fair value on reclassification date.
- However, cumulative gain or loss previously recognised in other comprehensive income (OCI)
is removed from equity and adjusted against fair value of financial asset at reclassification
date.
- As a result, the financial asset is measured at reclassification date as if it had always been
measured at amortised cost. This adjustment affects OCI but does not affect profit or loss
and therefore, is not a reclassification adjustment.
- Effective interest rate and measurement of expected credit losses are not adjusted as a
result of reclassification.
Example 22:
Bonds for Rs 100,000 reclassified as Am ortised cost. Fair value on reclassification is Rs 90,000
and Rs 10,000 loss was recognised in OCI till date of reclassification. Pass required journal entry.
Solution
ACCOUNTING AND REPORTING OF Amount Amount
FINANCIAL INSTRUMENT SSolution Particulars
Bonds at FVOCIDr. 10,000
To OCI-Loss on reclassification 10,000
[Being lossrecognized in OCI now reversed
priorto reclassification]
Bonds(Amortised cost)Dr. 100,000
To Bonds at FVOCI 100,000
[Being bondsre classified from FVOCI to
Am ortised cost]
25.38
INDAS 109
Case 6: FVOCI to FVTPL
- The financial asset continues to be measured at fair value.
- The cumulative gain or loss previously recognised in other comprehensive income (OCI) is
reclassified from equity to profit or loss as a reclassification adjustment at the
reclassification date.
Example 23:
Bonds for Rs 100,000 reclassified as FVTPL. Fair value on reclassification is Rs 90,000. Pass the
Solution
P&L-Loss on reclassification Dr. 10,000
To OCI-Loss on reclassification 10,000
Bonds at FVTPL Dr. 90,000
To bonds at FVOCI 90,000
(G) LOAN GRANTED BY PARENT CO. TO SUBSIDIARY AT CONCESSIONAL RATE:
SITUATION 1 - IF LOAN IS REPAYABLE ON DEMAND

(a) Entire consideration received/discharged shall be treated as FL/FA in respective books.
(b) Finance Cost/Income shall be recognised at contractual interest only.
SITUATION 2 - IF LOAN IS FOR A FIXED TERM

Step 1:
Calculate fair value of loan using Effective rate of interest (Am ortised Cost Method).
Step 2:
Any difference between loan amount paid and fair value of step 1 will be considered as Cost of
Investment in subsidiary and capitalised accordingly.
Step 3:
Under consolidated financial statements, while comparing Cost of investment with the equity of
subsidiary (Net Assets), such capitalised amount will be offset since it is included in cost of parent
and equity of subsidiary.
25.39
INDAS 109
Example 24
XYZ Ltd. is a company incorporated in India. It provides INR 10,00,000 interest free loan to its
wholly owned Indian subsidiary (ABC). There are no transaction costs.
How should the loan be accounted for, in the Ind AS financial statements of XYZ, ABC and
consolidated financial statements of the group?
Consider the following scenarios:
a) The loan is repayable on demand.
b) The loan is repayable after 3 years. The current market rate of interest for similar loan is
10% p.a. for both holding and subsidiary.
c) The loan is repayable when ABC has funds to repay the loan.
Solution:
Ind AS 109 requires that a financial assets and liabilities are recognized on initial recognition at
its fair value, as adjusted for the transaction cost. In accordance with Ind AS 113 Fair Value
Measurement, the fair value of a financial liability with a demand feature (e.g., a demand deposit)
is not less than the amount payable on demand, discounted from the first date that the amount
could be required to be paid.
Using the guidance, the loan will be accounted for as below in various scenarios:
Scenario (a)
Since the loan is repayable on demand, it has fair value equal to cash consideration given. The
parent and subsidiary recognize financial asset and liability, respectively, at the amount of loan
given. Going forward, no interest is accrued on the loan.
Upon repayment, both the parent and the subsidiary reverse the entries made at origination.
Scenario (b)
Both parent and subsidiary recognize financial asset and liability, respectively, at fair value on
initial recognition. The difference between the loan amount and its fair value is treated as an
equity contribution to the subsidiary. This represents a further investment by the parent in the
subsidiary.
25.40
INDAS 109
Accounting in the books of XYZ Ltd (Parent)
S.No. Particulars Amount Amount
On the date of loan
1 Loan to ABC Ltd (Subsidiary) Dr. 7,51,315
Deemed Investment (Capital Contribution) 2,48,685
in ABC Ltd Dr.
To Bank 10,00,000
(Being the loan is given to ABC Ltd and
recognised at fair value)
Accrual of Interest income
2 Loan to ABC Ltd Dr. 75,131
To Interest income 75,131
(Being interest income accrued) – Year 1
On repayment of loan
5 Bank Dr. 10,00,000
To Loan to ABC Ltd (Subsidiary) 10,00,000
Accounting in the books of ABC Ltd (Subsidiary)

S.No. Particulars Amount Amount
On the date of loan
1 Bank Dr. 10,00,000
To Loan from XYZ Ltd (Payable) 7,51,315
To Equity (Deemed Capital Contribution 2,48,685
from ABC Ltd)
(Being the loan is given to ABC Ltd and
recognised at Fair value)
Accrual of Interest
2 Interest expense Dr. 75,131
To Loan from XYZ Ltd (Payable) 75,131
(Being interest expense recognised) – Year I
(Being interest expense recognised) – Year II
(Being interest expense recognised) – Year III
On repayment of loan
5 Loan from XYZ Ltd (Payable) Dr. 10,00,000
To Bank 10,00,000
25.41
INDAS 109
(H) TRANSACTION COSTS:
· Transaction costs includes fees and commission paid to agents (including employees acting as
selling agents), advisers, brokers and dealers, levies by regulatory agencies and security
exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums
or discounts, financing costs or internal administrative or holding costs.
· Any transaction costs incurred for acquisition of the financial asset are adjusted upon initial
recognition while determining fair value.
· If an entity originates a loan that bears an off-market interest rate (eg 5 per cent when the
market rate for similar loans is 8 per cent), and receives an upfront fee as compensation, the
entity recognises the loan at its fair value, ie net of the fee it receives.
Transaction cost under Financial Assets

(a) FA under AMC – Included as a part of Financial Assets (+/- in the initial outflow) i.e.
Included in calculation of effective interest rate and amortised over expected life of the
instrument.
(b) FA under FVTOCI - Included as a part of Financial Assets (+/- in the initial outflow)
(c) FA under FVTPL – Directly charged to Profit and Loss a/c (no capitalisation)
Transaction Cost under Financial Liabilities

(a) FL under AMC – Included as part of Financial Liabilities (+/- in the initial inflow)
But in case of compound financial instrument - allocated to the liability and equity
components of the instrument in proportion to the allocation of proceeds.
(b) FL under FVTPL - Directly charged to Profit and Loss a/c.
Transaction cost under Equity:

Deduction from equity to the extent they are incremental costs directly attributable to the equity
transaction that otherwise would have been avoided. The costs of an equity transaction that is
abandoned are recognised as an expense.
Example 25: (on Allocation of transaction Cost for Compound FI)

Issued Convertible Debentures of 16,00000 @7% for 4years. Principal is mandatory Convertible
into Equity. Interest is payable in cash annually.
Initial Transaction Cost = 50,000
Same Debentures without Conversion could have been issued @10% p.a.
Solution:
Above TC of 50,000 belongs to Compound FI. i.e., some portion of FL & Some portion of Equity
Transaction Cost belongs to FL (AMC) shall be adjusted in Borrowing part & Transaction Cost
belongs to equity portion shall be transfer to other equity.
How to Allocate Transaction Cost: - Allocation in the Ratio of FL Component & Equity Component
FL Component: - Sum of PV of 1,12,000 @10% for 4 years = 3,55,025/-
25.42
INDAS 109
Equity Component: - 16,00,000 – 3,55,025 = 12,44,975/-
Allocation of transaction Cost to FL & Equity:

(a) To F/L = 11,095/-
Adjusted against F/L Component
Net F/L to be recognised initially = 3,55,025 – 11,095 = 3,43,930
(b) To Equity = 38,905/-
Transfer to other equity = 12,44,395 – 38,905 = 12,06,070
Journal Entry of Initial Recognition:
Bank A/c Dr. 15,50,000

To 7% Debentures (FL) A/c 3,43,930
To 7% Debentures (EQ) A/c 12,06,070
Alternate
Bank A/c Dr. 15,50,000
Retained Earnings A/c Dr. 38,905
To F/L A/c 3,43,930
To Equity Component* A/c 12,44,975
*Equity Component of Debt Instrument
Note: Since F/L is initially recognised at 3,43,930/- for which 10% market rate doesn't reflect
true (effective rate) for interest Calculation.
Therefore, we would recalculate the ERI based on following info:
ERI is a rate at which sum of PV of 1,112,000p.a. for 4 years should be equal to 3,43,930/-
PV of 1,12,000 @ 10% = 3,55,025
PV of 1,12,000 @ 12% = 3,40,183
10% + Increase in % 2% ?
Decrease in ₹ 14,842 11,095
ERI = 10% + 1.49% = 11.49%

FL Component shall be amortised @11.49% P.a.
FL (AMC) Equity
Book Value at 2nd Year end 5,60,799 1,08,922
Revised Values 6,21,999 91,922
61,200 17,000
Loss Adjusted to EQ.
(SOCIE)
25.43
INDAS 109
(I) IMPAIRMENT OF FINANCIAL ASSETS/LOSS ALLOWANCE:
Impairment Loss or Loss allowance is not required in case of Investment in Equity Instruments
(FVTPL or FVTOCI) and FA under FVTPL
Method to be used = “Expected Credit Loss method”
Expected credit loss is equal to the sum of present values of expected cash flows that may not be
realised in future as per the current circumstances. (discount rate shall be original ERI)
Following approaches can be followed for impairment process:
(a) General Approach
§ The general approach requires an entity to recognise, at each reporting date, an
impairment loss allowance using either 12-month ECL or lifetime ECL.
§ 12-month ECL typically results in lower impairment since it focuses only on probability of
default (PD) within next 12-month period, as against PD over the life of an instrument.
§ The use of ECL depends on whether there has been a significant increase in credit risk on
the instrument since its initial recognition.
§ This approach is applicable to all financial instruments covered by impairment requirements
of Ind AS 109, except instruments covered in the following two approaches.
(b) Simplified Approach
§ This approach does not require an entity to track changes in credit risk. Rather, each entity
recognises impairment loss allowance based on lifetime ECLs at each reporting date, right
from its initial recognition.
§ The application of simplified approach is mandatory for trade receivables or any contractual
right to receive cash or another financial asset that result from transactions that are
within the scope of Ind AS 115.
(c) Impairment Loss on Specific identified Financial Asset
Impairment loss is equal to: -
PV of Agreed CCF xxx
(-) PV of estimated CCF to be realised at Original ERI xxx
Impairment Loss xxx
Ø Lifetime expected credit loss is the expected credit losses that result from all possible default
events over the expected life of a financial instrument.
Ø 12-Month expected credit loss is the portion of the lifetime expected credit losses that
represent the expected credit losses that result from default events on a financial instrument
that are possible within the 12 months after the reporting date.
Ø If the Financial Asset is Credit impaired then always use Lifetime expected credit loss
approach. (Credit impaired means High risk of default or credit risk has been increased
significantly like breach of loan terms and conditions, IBC proceedings are initiated etc)
If the amount of FA remains overdue for more than 30 days period there is rebuttable
presumption that Financial Asset is Credit Impaired.
25.44
INDAS 109
Loss Allowance under ECL = Amount of FA x Probability of Unrealised cash flows (%) x
Probability of default (%)
Following decision table should be considered:

The decision tree to be applied in determining whether the entity needs to provide for 12-month
expected credit losses or life time expected credit losses is applied as follows:
Three Stage Model for Impairment
Stage 1 Stage 2 Stage 3
Initial Significant Credit
Particular increase in Impaired
Recognition
credit risk
Credit Risk Low Moderate to Significant
High
ECL Model 12 Month ECL Life-time ECL Life-time ECL
Interest recognition Interest on Interest on Interest on
gross gross net carrying
recognition recognition amount
(J) CREDIT IMPAIRED FINANCIAL ASSETS

A financial asset is credit-impaired when one or more events that have a detrimental impact on the
estimated future cash flows of that financial asset have occurred. Evidence that a financial asset
is credit-impaired include observable data about the following events:
(a) Significant financial difficulty of the issuer or the borrower;
(b) Breach of contract, such as a default or past due event;
(c) Lender(s) of the borrower, for economic or contractual reasons relating to the borrower's
financial difficulty, having granted to the borrower a concession(s) that the lender(s) would
not otherwise consider;
(d) It is becoming probable that the borrower will enter bankruptcy or other financial
reorganization;
(e) The disappearance of an active market for that financial asset because of financial
difficulties; or
(f) The purchase or origination of a financial asset at a deep discount that reflects the incurred
credit losses.
(K) OFFSETTING A FINANCIAL ASSET AND A FINANCIAL LIABILITY

A financial asset and a financial liability shall be offset and the net amount presented in the
statement of financial position (Balance Sheet) when, and only when, an entity:
(a) Currently has a legally enforceable right to set off the recognised amounts
(b) Intends either to settle on a net basis, or to realise the asset and settle the liability
simultaneously
25.45
INDAS 109
Example 26: -
Staff Loan Given of Rs. 10,00,000 repayable in 4 equal principal and interest separately
@3% p.a. Market Rate of Interest 9% p.a.
1st Year Payment received on Time..
But at end of 1st Year, it is expected that remaining Principal can be recovered only after 5
years. & No interest will be recovered.
Solution:
(a) PV of CCF (as per Contract): 6,71,882/-
Year CCF
1 2,72,500
2 2,65,000
3 2,57,500
Sum of PV @9% for 3 Years Annuity = 6,71,882/-
(b) PV of Estimated CF to be realised: - 4,87,449/-

PV of 7,50,000 x PV @ 9%
(c) Impairment Loss (a-b) = 1,84,433

Journal Entries:
Impairment Loss A/c Dr. 1,84,433
To Loss Allowance A/c 1,84,433
Example 27: -
Entity acquired 7.5% bonds of Rs. 500 lakhs, Interest is payable annually. & Principal will be
payable after 4 years at 8% Premium (Intention to Hold till maturity = AMC)
a) On 1st year end: - Interest received, No Significant increase in Credit Risk (hence 12
Month ECL) 12M POD = 0%
b) On 2nd Year end: - Interest received, No Significant risk
12M POD = 1.5%
LGD = 20% of (Interest + Principal) May not be recovered.
c) On 3rd Year End: - Interest not received, Significant increase in Credit Risk
LTECD = POD = 8%
LGD = 90% of (Interest + Principal)
d) On 4th Year End: - Interest not received & Borrower defaulted IBC initiated only 80
lakhs principal is expected to recover
Solution:
Working Note 1:
Sum of PV of CCF of 37.5 (interest every Year) + 540 (Principal at the end of 4th Year) at
Effective Interest Rate should be = Rs. 500 (i.e. Initial Proceeds)
At 10% = 487.70
25.46
INDAS 109
At 9% = 504.04
EIR = 9.24%
Working Note 2: Agreed repayment schedule

Year Outstanding Interest Payment Closing
amt @9.24% Balance
1 500 46.2 37.50 508.7
2 508.7 47 37.50 518.20
3 518.20 47.88 37.50 528.58
4 528.58 48.92 577.50 0
Working Note 3: Actual Schedule & Impairment Loss

Year Opening Interest Actual Closing Impairment
O/s Amt @9.24% Repayment Balance Loss
1 500 46.2 37.50 508.7 0
2 508.7 47 37.50 518.20 1.55
3 518.20 47.88 0 566.08 39.21
4 566.08 48.92 80 534.62 493.86
(566.08 – 40.76)
x 9.24%
Loss Allowance A/c Dr. 40.76

Impairment loss A/c Dr. 493.86
To FA A/c 534.96
Working Note 4: Impairment Loss of 2nd Year.

LGD = 20%, POD = 1.5%
PV of Estimated recovery @9.24% = 30
PV @9.24 of 30+432 = 414.61
Expected Loss = 518.20 – 414.61 = 103.58 x 1.5% = 1.55
Impairment Loss (P&L) A/c Dr. 1.55

To Loss Allowance A/c 1.55
Working Note 5: Impairment Loss on 3rd Year end

LGD = 90%
Year Opening O/s Amt
Outstanding CA of 3rd Year (566.08 x 90%) 509.47
POD8%Impairment Loss 40.76
(-) Impairment Loss Last Year (1.55)
CY impairment Loss 39.21
Impairment Loss (P&L) A/c Dr. 39.21

To Loss Allowance A/c 39.219---6
25.47
INDAS 109
6. DERECOGNITION OF FINANCIAL ASSETS
1) Derecognition refers to the timing of removing a financial asset from the balance sheet.
2) FA under FVTOCI category – any gain or loss previously recognised in OCI shall be
recycled to Profit and Loss a/c (except for Equity instruments not held for trading
designated under FVTOCI)
3) Derecognition occurs when: -

a) Risks & Rewards are Transferred
b) Cash Flows are expired (Maturity Over)
c) Cash Flows are Transferred (i.e., Transfer of Right to receive future Cash Flows)
d) Cash Flows as received will be transferred immediately with a condition that
original owner cannot sale the FA
4) Types of Derecognition
(a) Full derecognition:
Entire Risks & Rewards are transferred
(b) Partial Derecognition:
Financial Asset is Sub-Divided into two parts: -
(1) Financial Asset Retained
(2) Financial Asset Transferred
5) Partial Derecognition occurs when any of the following 3 conditions are met:
a) When only Specifically identified Cash Flows of FA are transferred;

e.g.: - Investment in 10% Debentures. Transfer of Interest Recovery
Year CCF
0 Interest
1 Interest
2 Interest
3 Interest
4 Interest + Principal
b) When Specified Proportion of Financial Asset is Transferred out of full Asset;

e.g.: Investment in 10% Debentures
(Right to Recover Interest p.a. and Principal)
Transferred 80% rights of full Asset
25.48
INDAS 109
(c) Only Specific Proportion of Specifically identified FA.
e.g., Investment in 10% Debentures where we recover interest p.a. & principal at end.
We transferred right to receive 50% portion of interest part.
Example 28 - on Partial Derecognition:

Bank has advanced a loan having carrying amount of 10,00,000 with contractual interest rate of
8% p.a. Remaining Term = 5 Years. Principal repayment at 5th year end.
Bank transferred rights to receive interest cash flows to another party at Rs. 3,00,000
Current Market Interest Rate is 9% p.a.
Solution:
Loan (FA) Carrying Amount = 10,00,000 which consist of Carrying Amount of Principal Strip and
Carrying Amount of Interest Strip.
CA of Entire FA shall be divided into CA of Principal Strip & CA of Interest Strip in the ratio of
Fair Values.
Calculation of Fair Values: -
FV of Principal Strip = 10,00,000 x PV @ 9% for 5th Year = 6,49,931
FV of Interest Strip = 80,000 x PV @ 9% for 5 Years = 3,11,172
CA of Principal retained = 10,00,000 x (6,49,931 / 9,61,103)

Therefore, CA of Interest Part Sold = 10,00,000 – 6,73,234 = 3,23,766
Journal Entry:
Loan (Principal) A/c Dr. 6,73,234

Loan (Interest) A/c Dr. 3,23,766
To Loan (FA) A/c 10,00,000
Bank A/c Dr. 3,00,000

Loss (P&L) A/c Dr. 23,766
To Loan (Interest) A/c 3,23,766
Example 29: -
We have invested in 12% Debenture of 25,00,000/- (CA = 25 lakhs). Redemption is due at par
after 5 years.
We have Sold (with Risks) Future Interest Cash Flows to the Extent of 75% & Also 20%
Principal Cash flows to another party at Rs. 9,00,000. Market Interest Rate is 10% p.a.
Show the required Accounting.
25.49
INDAS 109
Solution:
1) FV Calculation:
a) Sold Part
Year CCF
1 2,25,000
2 2,25,000
3 2,25,000
4 2,25,000
5 2,25,000 + 5,00,000
PV @10% = 11,63,388 (Fair Value of Sold Strip)

b) Retained Part:
Year CCF
1 75,000
2 75,000
3 75,000
4 75,000
5 75,000 + 20,00,000
PV @10% = 15,26,152 (Fair Value of Retained Strip)

Carrying Amount = 25,00,000
Therefore Carrying Amount is Strip Sold = 25,00,000 x 11,63,388 / 26,89,540 = 10,81,401
Carrying Amount of Strip Retained = 25,00,000 – 10,81,401 = 14,18,599
Loss on Derecognition of Strip Sold = 10,81,401 – 9,00,000 = 1,81,401
Example 30: Derecognition of FA against another FA:

Entity is holding 11% Convertible Debentures of another entity with carrying amount of
12,00,000. It got option of conversion and availed. It received equity shares of entity having
FV of 13,50,000. What will be the Journal Entries.
Investment in Equity A/c Dr. 13,50,000

To FV Gain (OCI) A/c 1,50,000
To Investment in Debentures A/c 12,00,000
Note: if Designated @FVTOCI then gain shall be booked in OCI.

25.50
INDAS 109
6) Transfer of FA when neither Substantial Right & Risk are retained nor transferred.
Situation 1 Situation 2
Control Over FA is Lost Control Over FA is Retained.
E.g.: FA sold with an option to buyer to E.g.: Debt Factoring arrangement

resell in future with Partial Risk. (Partial Resources)
Derecognition of FA shall be made
Example 31:
Investor is holding equity shares of another entity at Rs. 1,00,000/- & sold it at Rs. 1,25,000
with following Conditions.
Case 1: Investor shall repurchase FA after 6 months @1,50,000/-

Investor has not passed control to buyer since it is obliged to repurchase after 6 months it
is already a financing arrangement. No Derecognition shall be made.
Bank A/c Dr. 1,25,000

To Loan (FL) A/c 1,25,000
After 6 Months
Loan (FL) A/c Dr. 1,25,000

Interest A/c Dr. 25,000
Case 2: Investor has given a put option to Buyer to sell these FA back to Investor after
6months at 2,00,000/-
Investor lost the control. Hence, Derecognition shall be made.
Bank A/c Dr. 1,25,000

To FA A/c 1,00,000
To Gain A/c 25,000
Case 3: Investor has given an option to Buyer to sell in 6 Months at 50,000/- & this
option is deeply out of money.
Bank A/c Dr. 1,25,000

To FA A/c 1,00,000
To Gain A/c 25,000
25.51
INDAS 109
7) Let's Know about Debt Factoring
Type 1: With full recourse (No Risk is Transferred)
a) Bad-Debts risk is retained fully by seller (Original Party)
b) Therefore, No Control is Passed & Hence no Derecognition.
c) Amount received from Factor (Agent) is to be recognised as Financial Liability (with
Amortised Cost Category)
Example 32.: Jai Ltd. the owner having debtors of 50,00,000/- transferred the right to
Mansi Ltd. (Factor) to receive a cash of 48,00,000/-
In the books of Jai Ltd.
1) Debtors will be continued @50,00,000
2) Amount Received shall be treated as Financial liablitiy:
Bank A/c Dr. 48,00,000

To Financial Liability A/c 48,00,000
3) Case 1: Factor recovered full 50 Lakhs from Debtors:
Financial Liability A/c Dr. 48,00,000

Loss A/c Dr. 2,00,000
To Debtors A/c 50,00,000
4) Case 2: Factor Recovered 49 Lakhs
Financial Liability A/c Dr. 48,00,000

Loss A/c Dr. 2,00,000
(Jai will recover remaining 100000 from
Debtors)
Suppose Jai Ltd. recovered 80000 only:
Bank A/c Dr. 80,000

Loss A/c Dr. 20,000
Type 2: Without Recourse (Transfer of Right & Risk)

a) Bad Debts risk shall be born by Factoring agent.
b) Therefore, Control over Financial Asset is Passed by Seller, Hence Derecognition Shall
apply.
1) Bank A/c (Sale Proceeds) Dr.
To Financial Asset A/c (Debtors)
25.52
INDAS 109
Case 3: With Partial Recourse (Risk & Right neither transferred nor retained)
1) Bad-debts risk is partially transferred
2) Owner of Financial Asset (Loan Receivable) has some involvement in Financial Asset
Transferred
Example 33: -
An Entity (Bank) has 100 lakhs of Loan Assets and there are assigned to a factoring asset at
94 lakhs Cash. With recourse of a maximum of 5 lakhs of Bad-debts.
Expected Bad-debts of Rs. 2,00,000 may occur.
Journal Entries:
Full Derecognition:
1) Bank A/c Dr. 94 lakhs

Loss on Derecognition (FA) A/c Dr. 6 lakhs
To Loan Assets A/c 100 lakhs
2) Continuing involvement in Asset A/c Dr. 5 lakhs

To Associated Liability A/c 5 lakhs
(Continuing involvement in Asset means - if Bad Debts occur we will be entitled to recover to
the extent of 5 Lakhs directly from debtors) and (Associated Liability means - if bad debts
occur we have to pay it to Factoring Agent)
3) Loss on Derecognition A/c Dr. 2 lakhs

To Provision for Associate Liability A/c 2 lakhs
Combined entry (Alternate):
Bank A/c Dr. 94 lakhs

Continuing involvement in Asset A/c Dr. 5 lakhs
Loss on Derecognition A/c Dr. 8 lakhs
To loan Asset A/c 100 lakhs
To Associate Liability A/c 7 lakhs
Example 34: -
An entity has loan assets of 80 lakhs & entered into a factoring agreement @75 lakhs with
recourse up to a max. of
Case 1: Nil (All rights and risks are transferred)
Case 2: 75 lakhs (substantial Rights & Risks are not transferred Hence, No Derecognition)
Case 3: 15 lakhs (Substantial Rights & Risk neither retained nor transferred), Expected Bad
debts are 2.5 Lacs (i.e. FV of guarantee)
25.53
INDAS 109
Solution:
Case 1:

Loss A/c Dr. 5 lakhs
To Loan Asset A/c 80 lakhs
Case 2:
Bank A/c Dr. 75 lakhs 75 lakhs
To Financial Liabilities A/c 75 lakhs
Case 3:
Continuous Involvement A/c Dr. 15 lakhs
Profit & Loss A/c Dr. 7.5 lakhs
To Loan Asset A/c 80 lakhs
To Associated Liabilities A/c 17.5 lakhs
Example 35: -
Loan Asset (10%) of 50,000 CA & Fair Value 56,000 show A/c in Following Independent Cases: -
Case 1: Derecognition
Loan Asset Sold @56,000
Bank A/c Dr. 56,000

To Loan Asset A/c 50,000
To Gain A/c 6,000
Case 2: Cash Flow Expired

Loan Asset Redeemed @50,000 Face Value
Bank A/c Dr. 50,000

To Loan A/c 50,000
Case 3: Partial Derecognition

80% of all Cash Flows transferred for Rs. 44,800/- (Without recourse)
CA = 50,000
Retained = 10,000
Transferred = 40,000
Financial Assets A/c (Transferred) Dr. 40,000

Financial Asset A/c (Retained) Dr. 10,000
To Financial Asset (Full) 50,000
25.54
INDAS 109
Assuming FV of transferred Portion is also 44800/-
Therefore, FV of retained portion = 56,000 – 44,800 = 11,200
Bank A/c Dr. 44,800

To Financial Asset (Strip transfer) A/c 40,000
To Profit & Loss A/c 4,800
Case 4: Interest portion transferred for Rs. 40,000 (principal retained) (without recourse)
CA = 50,000
Carrying Amount of Interest Portion = 50,000 x 40/56 = 35,714 (assuming FV of Interest
portion is also 40,000)
Principal retained = 14,285
Bank A/c Dr. 40,000

To Financial Asset (Sold) A/c 35,714
Case 5: Loan Asset transferred @ 56,000 with recourse for loss to the extent of Rs.
14,000 and FV of guarantee is 3000/-
Bank A/c Dr. 56,000

Continuous Involvement A/c Dr. 14,000
To Associated Liabilities A/c 17,000
Case 6: Transferred 8% (out of 10%) Interest Strip along with full principal also at Rs.
51,000 with recourse to the extent of 5,000 (FV of guarantee 700)
Carrying Amount = 50,000
Carrying Amount of Strip Transferred = 50,000 x 51/56 = 45,536
Carrying Amount of Strip Retained (B/F) = 4,464
Bank A/c Dr. 51,000

Financial Asset (Strip Retained) A/c Dr. 4,464
Continuous Involvement A/c Dr. 5,000
To Associate Liabilities A/c 5,700
**Reconciliation - Gain on Strip transferred = 5,464 (51000 – 45536) less 700 Provision
25.55
INDAS 109
8) Derecognition of Financial Liabilities
Ÿ Cases of Derecognition:
(a) Cash Flows expired on Maturity i.e., Redemption
(b) Early settlement of compounded FI
(c) Extinguishment of Financial Liabilities due to change in terms
Ÿ Gain / Loss on Derecognition always transfer to Profit & Loss A/c
Ÿ If Financial Liabilities is settled by consideration other than cash like issuing own
Equity Shares / any Asset then measure the consideration at Fair Value & Charge
difference to Profit & Loss A/c. (refer example below)
Example 36:
Entity having Loan Liability of 1,00,000. It is settled by issuing equity shares whose face
value is 40,000 & Market Value is 85,000
Loan A/c Dr. 1,00,000

To Equity Share Capital A/c 40,000
To Securities Premium Reserves A/c 45,000
Example: 37
Sea Ltd. has advanced a Loan whose outstanding amount is Rs. 10 lakhs @ 18% pa for 10 years.
The loan had a fair value of Rs. 12,23,960 at the effective interest rate of 13%. To mitigate
prepayment risks but at the same time retaining control over the loan, Sea Ltd. transferred its
right to receive the principal amount of the loan on its maturity with interest, after retaining
rights over 10% of principal and 4% interest that carries Fair Value of Rs. 29000, and 184620
respectively. The consideration for the transaction was Rs. 990000. The interest component
retained included a 2% fee towards collection of principal and interest that has a fair value of
65160. Defaults, if any are deductible to a maximum extent of the company s claim on principal
portion. You are required to show the journal entries to the record the derecognition of Loan.
(Answer: Stirp Sold – 825468 & Gain on Transfer – 164532/-)
25.56
INDAS 109
UNIT – 3
DERIVATIVES, EMBEDDED DERIVATIVES
& HEDGE ACCOUNTING
UNIT 3 - INDEX
1 Meaning of Derivatives 25.58
2 Measurement & Accounting of Derivatives 25.59

3 Types and Accounting of Various 25.60
Derivative Contracts
4 Embedded Derivatives 25.65
5 Hedge Accounting 25.67
25.57
INDAS 109
1. MEANING OF DERIVATIVES
Koi bhi contract jiska price koi dusre financial/non-financial item (underlying) se derive ho.
Ek party k liye favorable position create hoti hai aur dusri party k liye unfavorable position banti
hai i.e. FA for one party and FL/Equity for another.
There can be two types of derivatives –

1. Standalone derivative contracts (Options, Futures, Forwards etc); and
2. Embedded derivative contracts - which are part of or included in a hybrid contract, in which
some non-derivative host is included.
It should have the following characteristics;

a. Its value changes in response to change in an underlying. (Underlying can be equity share,
stock index, Foreign Exchange rates, interest rates, any financial instrument, commodity
index, commodity price i.e gold, or any other variable item that has some value or even a non-
financial asset)
b. It requires no investment or very little initial investment.
c. It is settled at a future date
Note: It may settle on net to net basis (i.e in cash without any delivery) in case of non-financial item
or it may settle with delivery also for Financial Items.
Example 38:
PQR Ltd. issues a call option (i.e. an option to buy) to ABC Ltd. to subscribe to PQR Ltd.'s equity
shares at a price of ` 100 per share. The call option is to be settled on a 'net' basis i.e. without
physical delivery of shares. If at the balance sheet date, market value of equity share of PQR
Ltd. is ` 110 per share, PQR Ltd. will be obliged to pay ` 10 to settle the option. Such a condition is
potentially unfavourable to PQR Ltd. and hence Rs. 10 represents a financial liability for PQR
Ltd.
Example 39:
Company owns an office building. Company enters into a put option with an investor that permits
the company to put the building to the investor for Rs. 150 million. The current value of the
building is Rs. 175 million. The option expires in 5 years. The option if exercised may be settled
through physical delivery or net cash, at company s option. How do the company and the investor
account for the option?
Hint: If settlement will be on net to net then this contract (put option) is Financial Instrument If
settlement by way of physical delivery then this is not a financial instrument.
25.58
INDAS 109
2. MEASUREMENT & ACCOUNTING OF DERIVATIVES:
(i) Derivatives are always measured at Fair Value and accounted under FVTPL category, except
derivatives that qualify as hedging instruments.
(ii) Basic Principle: All derivative contracts should be recognised on balance sheet at Fair Value
whether there is a favorable position or unfavorable position.
(iii) This means that on Balance Sheet date, if there are any unsettled derivative contracts then
we have to create Financial Asset (Favourable position) or Financial Liability (Unfavourable
Position) at Fair values through P&L a/c.
(iv) Fair value means “EXIT PRICE” i.e the price that would be paid to transfer a liability or the
price that would be received when transferring an asset in an orderly transaction between
market participants.
25.59
INDAS 109
3. TYPES & ACCOUNTING FOR VARIOUS DERIVATIVES
Eg. of Derivatives: Futures, Options, Hedging, Forwards, Swaps
3.1 FUTURES
(i) Future Contracts are entered into with the help of Exchange.
(ii) It has Defined Underlying, Defined Tenure, Defined Size.
(iii) Future Contract can have following two positions:
Long Position: Price will go up
Short Position: Price will go down
(iv) Follow the three steps accounting as under:
· On the date of contract: No Accounting (except for margin payment), only a proper
disclosure can be given.
· At each reporting dates: Derivative Future Asset or Liability shall be recognized through
Profit and Loss a/c (FVTPL) (difference amount only)
· On settlement Date: Gain or Loss transfer to Profit and Loss A/c
Accounting Entries:
1. For Initial Margin: (this can be treated as Security deposit)

Initial Margin (Futures) A/c Dr.
To Bank A/c
2. For Mark to Market Margin:
Bank A/c Dr. OR MTMDM A/c Dr.
To MTMDM A/c To Bank A/c
(in some cases this margin may not require to be paid every time)
3. Recognition on BS Date: (Ind AS application) – at Fair Value
Futures A/c (Asset) Dr. OR P&L A/c Dr.
To P&L A/c To Futures A/c (Liability)
4. Settlement of Future Contract (if margin is received/paid earlier)
MTMDM A/c Dr. OR Futures (Liability) A/c Dr.
To Futures (Assets) A/c To MTMDM A/c
5. Settlement of Future Contract (if no margin is received/paid earlier)
Bank A/c Dr. OR Futures (Liability) A/c Dr.
To Futures (Assets) A/c To Bank A/c
3.2 FORWARDS
(i) Same as Futures but without the help of Stock Exchange or any intermediary.
(ii) Customized contract between two parties.
(iii) Any Underlying, any size, any term.
(iv) Accounting is same as accounting for Future Contracts as above.
25.60
INDAS 109
3.3 OPTIONS
(I) Entered into with the help of Exchange. Defined Underlying, Defined Term, Defined Size.
(ii) Option contracts are Right without obligation for Holder and obligation without right for
Issuer/writer.
(iii) Here the holder needs to pay a premium to get the option (i.e. Right).
(iv) Option is for Non-Financial Asset without physical delivery (net cash settlement), this will be
covered under IndAS 109.
Option Contract shall have two Parties as follows:
Buyer of Options Seller of Option

Call position (Right to Buy) Call position (Obligation to Sell)
Put Position (Right to Sell) Put Position (Obligation to Buy)
(In both cases he has to pay premium) (In both cases he gets premium)
When to Exercise the Option?

Call Option – When market price is higher
Put Option – When market price is lower
Accounting Entries:
Option Holder Option Writter
1. On payment of option premium 1. On receipt of option premium
Derivative Option (Asset) A/c Dr. Bank A/c Dr.
To Bank a/c To Derivative option (Liability) A/c
2. On measurement at Balance Sheet 2. On measurement at Balance Sheet
date for unsettled Derivative date for unsettled Derivative
Derivative Option (Asset) a/c Dr. Fair Value loss (P&L) a/c Dr.
To Fair Value Gain (P&L) a/c To Derivative Option (Liability) a/c
Fair Value loss (P&L) a/c Dr. Derivative Option (Liability) a/c Dr.
To Derivative Option (Asset) a/c To Fair Value Gain (P&L) a/c
3. On Settlement date 3. On Settlement date
If contract is settled in Net Cash without If contract is settled in Net Cash without
physical delivery- physical delivery
Only in favourable position Only in Un-favourable position
Bank A/c Dr. Derivative Liability A/c Dr.
To Derivative Asset a/c To Bank a/c
25.61
INDAS 109
If contract is settled with physical delivery - If contract is settled with physical delivery -
Financial Asset a/c Dr. (FV) Derivative Liability a/c Dr. (BV)
To Bank a/c (Payment) Bank a/c Dr. (Payment)
To Derivative Asset a/c (BV) To Financial Asset a/c
Example 40- for Buyer: To get Call/Put option I need to pay option premium. This premium is non-
refundable. Amount of premium will be booked as Financial Asset until the expiry of Contract.
Suppose, I bought NIFTY 1 month call option on 1000 lots at strike price of Rs. 11050 at the
premium of Rs. 25/- per unit.
Day 1 Accounting – Option Premium (Asset) A/c Dr. 25000
To Bank a/c 25000
After 1 Month – Nifty is as follows:
Cases Nifty Index Exercise/Not Exercise Accounting Entry

1 10900
2 11000
3 11075
(Breakeven)
4 12000
5 12100
Now Suppose, before the end of 1 month, there is a BS date and NIFTY on that date becomes
11090. What should I do?
IND AS 109 requires that the derivative instruments needs to be fair valued through P&L. Since
this is a call option, Strike price is increased there is a favorable position (Gain of Rs. 15000)
Accounting at BS date:
25.62
INDAS 109
Suppose on settlement date the Nifty becomes 11040 –
Accounting on settlement date:
Example 41
Accounting for Equity Index Options
Mr. A buys the following equity index options and the seller/writer of these options is Mr.
Date of Type of Expiry Date Premium Per Contract Strike Price

Purchase Options Unit Multiplier (No.
of Units)
29 March, 03 S&P CNX Nifty May 31, 2003 15 200 880
Call
29 March, 03 S&P CNX Nifty May 31, 2003 20 200 885
Put
· Mr. A and Mr. B follow the financial year as the accounting year.
· On 31st March, 2003: For Call Option May 2003 Strike Price Rs. 880, closing rate of
premium Rs. 6 per unit. For put Option May 2003 Strike Price Rs. 885, closing rate of
premium Rs. 28 per unit.
· Price of S&P CNX NIFTY on 31st May 2003 Rs. 882.
Prepare Journal Entries.
Solve Here:
25.63
INDAS 109
Suppose on settlement date the Nifty becomes 11040 –
Accounting on settlement date:
3.4 INTEREST RATE SWAPS

These contracts are undertaken to cover the risk of Interest rates on variable or fixed rate of
interest.
Accounting Treatment
Step 1 – on Contract Date - Do nothing
Step 2 – on Balance Sheet Date, check whether the entity is in favourable position or
unfavourable position and create Financial Asset Receivable a/c or Financial Liability Payable a/c
accordingly by the net gain in interest swaps.
Step 3 – on settlement date, re-measure the Financial Asset or Liability based on position on
settlement date and then realise the Financial Asset or settle the financial liability in Cash.
Prepaid Interest Rate Swaps:
If interest rate swaps (Pay variable, get fixed rate) is prepaid, then these are not derivative
contracts, since the initial investment on these are not nil or very less.
25.64
INDAS 109
4. EMBEDDED DERIVATIVES
Any contract which has Two Elements, one is Host Contract (i.e. main contract) which is non-
derivative part of the contract and the other one is derivative part (it is embedded with the host
contract).
Examples of Embedded Derivatives:

1. Company MNL Ltd. holds a bond which is convertible into the ordinary shares of Company Z Ltd.
The hybrid contract is the convertible bond; the host contract is the bond asset; the embedded
derivative is the conversion option.
2. Company ABC Ltd. enters into a lease with an inflation factor, such that each year rentals are
adjusted for changes in risk price index. The hybrid contract is the entire lease; the host is the
lease contract; the embedded derivative is the adjustment to the risk price index.
3. Company PQR Ltd. sells furniture to Company XYZ Ltd. in USD. Both companies are located in
India. The hybrid contract is the entire sale contract which will be settled in USD; the host
contract is the Rupee sale contract; the embedded derivative is the foreign exchange Rs/USD
forward.
So what to do with this embedded derivative? Do we need to

separate this from host contract or not?
The answer is - if the host contract and embedded derivative are closely related with each
other, then no need to separate them.
If they are not closely related then derivative element is required to be accounted separately.
ACCOUNTING of EMBEDDED DERIVATIVES

Case – 1
No separation is required – Entire contract shall be accounted as one single contract as per the
relevant IndAS.
Case – 2
Separation is required –
(a) Contract of Sell/purchase in future-
· Record the sale/purchase at pre-determined forward rate (forward rate on the date of
contract)
· Consider changes in forward rate as Derivative Contract (FVTPL)
25.65
INDAS 109
(b) Prepayment option in Loan-
IF Financial Liability has an Option to prepay against premium (for Closure). Then as per the
Standard it will be treated as Embedded derivative Contract if the Book Value of loan is
Significantly Changed due to such Prepay Option.
What is Significant Change?

It depends on Management's Judgement.
Calculate value of Loan as per Amortised Cost Method
Calculate value of Loan as per ACM if prepayment option is exercised
If difference in above two values is significant then record separately the Derivative
Asset/Liability.
25.66
INDAS 109
5. HEDGE ACCOUNTING
Hedging means – Managing Risk or reducing risk in a Recognised Asset/Liability or Firm

commitment to buy an Asset or Highly forecast cash flow transaction by making a derivative or non-
derivative contract in a Financial Instruments in such a way that change in Fair value of Hedging
Instrument wholly or partially offset change in Fair value of of Hedged Item.
Some Important Terms:

(a) Hedged item – It may be a recognised Asset or Liabilitiy (Financial or Non-Financial such as
Foreign Currency Debtors/Creditors, Inventory etc), a firm commitment to buy asset or a
Highly probable Forecast Transaction which involves cash flows.
(b) Hedging instrument – It may be investment in Derivative instrument or non-derivative
instrument such as (Futures, Forwards, Options, Swaps).
(c) Firm Commitment: A firm commitment is a binding agreement for the exchange of specified
quantity of resources at specified future date or dates.
(d) Highly Forecast Cash Flow Transaction: A forecast transaction is an uncommitted but
anticipated future transaction which involves cash inflow or outflow.
Conditions for Hedge Accounting:

1. There must be eligible hedging instrument and eligible hedged items
2. At the inception of the hedging relationship, there must be a formal designation and
documentation of the hedging relationship and the entity's risk management objective and
strategy for undertaking the hedge.
3. Hedge effectiveness should exist. It means economic relations between hedged items and
Hedging instruments should exist.
If the above conditions are not fulfilled, then Hedging accounting will not be permissible. In that
situation, we will follow normal derivative accounting separately for Hedged Item and separate
accounting for Hedging Instruments.
25.67
INDAS 109
Step - 1 Identify the hedged item [ie, exposed to one or more risks]
Identify the hedging instrument [ie, a derivative or non*derivative

Step - 2 to off - set risks in cash flow/fair value of hedged item]
Evaluate if hedging relationship meets the requisite criteria for

Step - 3 hedge accounting
If hedge is effective, establish type of hedge -

A) Fair valu hedge
Step - 4 (B) Cash flow hedge
(C) Hedge of net investment in foreign operation
Step - 5 Account for hedging relationship basis guidance in Ind AS 109
5.1 CASH FLOW HEDGE

If the entity is having risk of change in future cash flows (inflow or outflow) from: Sale or
purchase of stock in future;
· Sale or purchase of shares in future; or
· From collection or payment to debtors or creditors; or
· From highly forecast cash flow transaction.
Step 1 – Fair value the Hedged Item (Recognised Asset/Liability) through OCI (Cash Flow hedge
reserve)
Step 2 – Fair value the hedging instruments (derivative contract) through OCI (Cash Flow hedge
reserve)
Step 3 – Amortise the actual loss over the life of contract by debiting Profit and Loss a/c and
crediting Cash Flow Hedge Reserve (OCI)
Step 4 – On settlement date, realise or settle the contract in cash. CFHR (OCI) account will be nil.
25.68
INDAS 109
Example 42:
Rajat Ltd. (INDAS Co.) sold Goods on Credit to a Foreign customer for 3 months Credit of
$1,00,000. Date of Sale 1/3/23. Exchange Rate $1 = Rs. 80 on 1/3/23
Rajat has financial risk in cashflow of above transaction that $ may fall. Therefore, Rajat Ltd.
entered into Forward contract to sell Dollars @$1 = Rs. 78.30. On 31/03/23 spot rate @$1 = Rs.
79.10 And 2 months Forward contract on Dollar is being sold at Rs. 78.20. On 1/6/23 settlement
date $1 = Rs. 78
Solution:
Transaction Date is 1/3/23
As per INDAS 21, Foreign Currency Transaction shall be initially recognised using Spot Rate.
Foreign Debtors A/c Dr. 80,00,000
To Sales A/c ($1,00,000 x 80) 80,00,000
On same Date i.e. 1/3, Rajat Ltd. entered into forward contract for which no Journal entry is
required.
Balance Sheet Date i.e., 31/3/23
1) Apply INDAS 21:
Subsequent Measurement of FCMI should be at Closing Ex-Rate i.e., $! = Rs. 79.10
Foreign Debtors = $1,00,000 x 79.10 = 79,10,000
(a) Exchange Difference A/c Dr. 90,000
To Foreign Debtors A/c 90,000
This Exchange Difference shall be transfer to “Cash Flow Hedge Reserve” through OCI for
the time being unlike normal treatment of transferring to P&L in INDAS 21.
(b) Cash Flow Hedge Reserve (OCI) A/c Dr. 90,000
To Exchange Difference A/c 90,000
2) Fair Value the Derivatives Forwards as per INDAS 109:

Booked 78.30
Mark To Market 78.20
Gain 0.10
(a) Derivative Forward (FA) A/c Dr. 10,000
To FV Gain A/c 10,000
This FV Gain shall be Transferred to “CFHR” through OCI unlike normal treatment of transfer to
P&L
(b) FV Gain A/c Dr. 10,000

To Cash Flow Hedge Reserve A/c 10,000
Now As per Hedge A/c, actual loss to Rajat i.e. (80 – 78.30) x $1,00,000 = 1,70,000 which is a
fixed loss to rajat, shall be amortised over the contract period to P&L through CFHR
25.69
INDAS 109
1,70,000 / 3 months = 56,667/-
Profit & Loss A/c Dr. 56,667
Cash Flow Hedge Reserve A/c

To Exchange Difference 90,000 By FV Gain 10,000
By P&L A/c 56,667
By Balance C/d 23,333
90,000 90,000
Settlement Date i.e., 1/6/23 $1 = 78

(1) Remeasure Hedge item @78/-
Earlier it was 79.10
(a) Exchange Difference A/c Dr. 1,10,000
To Foreign Debtors A/c 1,10,000
(b) Cash Flow Hedge Reserve A/c Dr. 1,10,000

To Exchange Difference A/c 1,10,000
(2) Remeasure Hedging Instrument @78/-

Earlier it was 78.20/-
(a) Derivative Forward (FA) A/c Dr. 20,000
To FV Gain A/c 20,000
(b) FV Gain A/c Dr. 20,000

Cash Flow Hedge Reserve A/c

To Balance b/d 23,333 By FV Gain 20,000
To Exchange Difference 1,10,000 By P&L A/c 1,13,333
1,33,333 1,33,333
Bank A/c Dr. 78,30,000

To Foreign Debtors A/c 78,00,000
To Derivatives Forward A/c 30,000
25.70
INDAS 109
5.2 FAIR VALUE HEDGE
· When there is a risk on Hedged item being other than Cash such as Inventory, Gold, Shares
of another co. held as investments or any other financial or non-financial asset.
· Under Fair value hedge, entity covers the risk by entering into hedging derivative contract in
Futures, Forwards or Options.
· Accounting Treatment – Both the Hedged Items and Hedging Instrument are measured at
Fair Value through Profit and Loss a/c.
· Exception: If equity instruments (not held for trading) are designated as FVTOCI then
measurement of Hedged item and Hedging Instrument shall be done through OCI. This fair
value gain or loss accumulated in OCI is not allowed to be recycled. On sale of Investment in
equity, this OCI shall be directly transferred to General reserve.
5.3 HEDGE OF NET INVESTMENT IN FOREIGN OPERATION
Hedge of a net investment in foreign operation, including a hedge of a monetary item that is
accounted for as part of the net investment, shall be accounted for similarly to cash flow hedges:
Hedge of net investment in

foreign operation
Portions of gain/loss on Ineffective Portion

hedging instrument that is
determined to effective hedge
Gain/loss recognized in Gain/Loss recognized

OCI (Foreign currency in P&L
translation reserve)
The cumulative gain or loss on the hedging instrument relating to the effective portion of the
hedge that has been accumulated in the foreign currency translation reserve shall be reclassified
from equity to profit or loss as a reclassification adjustment on the disposal or partial disposal of
the foreign operation.
25.71
INDAS 109
Student Notes:-
25.72
INDAS 109
TOPIC 24
INDAS 103 -
BUSINESS COMBINATION
Quote: “Knowing is not enough; we must apply.

Wishing is not enough; we must do”
INDAS 103
Index
S.No. Topics Covered Page No.

1 What is Business Combination? 24.3
2 Scope of INDAS 103 24.11
3 What to do when Transaction of Business 24.12
Combination Arise?
4 What Is Purchase Consideration Under Business Combination? 24.15
5 Non-Controlling Interest 24.17
6 Calculation of Goodwill or Gain from Bargain Purchase 24.19
7 Treatment of Dividend 24.26
8 Fair Value of Identifiable of Net Assets 24.33
9 Step Acquisition 24.38
Un-realised Profit/loss elimination on stocks/
10 24.41
assets transferred within the Group
11 Summary 24.42
12 Control obtained over Subsidiary without 24.45
Transfer of Consideration
13 Impairment of Goodwill 24.46
14 Change In Percentage Of Holding Of Parent Co. 24.49
15 Chain Holding 24.53
16 Share Based Payment Awards of Acquirer 24.58
17 Reacquired Rights 24.59
18 Demerger 24.62
19 Common Control Business Combination 24.63
20 Reverse Acquisition 24.68
24.2
INDAS 103
1. WHAT IS BUSINESS COMBINATION
A business combination is a transaction in which the acquirer obtains control of another business
(the acquiree).
Business generally means major Assets and Liabilities. If the assets acquired are not a business,
the reporting entity shall account for the transaction or other event as an asset acquisition. For
example acquisition of a “Shell” company is not a business combination.
In a simple language, Business combination covers accounting of Amalgamation of Companies,
Consolidation issues, Business Takeovers and Mergers.
Consolidation means: Grouping of Financial Statements of group companies. Group companies

means Holding co. (Parent Co.), Subsidiary Co., Associates and Joint Ventures.
What Consist BUSINESS consists of inputs and processes applied to those inputs
of Business? that have the ability to contribute to the creation of outputs.
Although businesses usually have outputs, outputs are not required
for an integrated set of activities and assets to qualify as a
business.
Business Means IndAS 103 defines business as an integrated set of activities and
assets that is capable of being conducted and managed for the purpose
of providing goods or services to customers, generating investment
income (BUSINESS consists of inputs and processes applied to those
inputs that have the ability to contribute to the creation of outputs.
Although businesses usually have outputs, outputs are not required
for an integrated set of activities and assets to qualify as a
business. such as dividends or interest) or generating other income
from ordinary activities.
Elements of INDAS 103 also sets that any business must contains three elements:
Business 1. Input: this is a resource (e.g. items of PPE, intangible assets,
etc.) that can contribute to creation of outputs;
2. Process: something that you apply to input and as a result, it
can contribute to creation of outputs, for example
processes, methods, etc.;
(Methods means Ideas/Creativity/Decision Making/Good
Management)
3. Output: the result of process applied to inputs, for example
goods or services provided to customers, and other Incomes.
24.3
INDAS 103
How to Assess: Under the new definition, the business does NOT necessarily have to
produce outputs.
Business vs. Asset Yes, typically it does, but the business can include as a minimum an input
and a substantive process.
“Substantive” is an important word here, because if you do have only
inputs and minor process, then it is NOT a business, but asset(s).
In fact, we need to assess whether the process involved is
substantive – that's perhaps the main focus of the assessment
“business vs. asset”.
When you assess whether there are inputs and substantive process,
first you need to see whether the business has outputs or not.
To determine whether acquired process is substantive, following has to
be considered:
1) If a set of activities and assets does not have output at the
acquisition date, an acquired process (or group of processes) shall
be considered substantive only if-
a) It is critical to the ability to develop or convert an acquired input or
inputs into outputs; AND
b) The inputs acquired include both “an organised workforce” that has
the necessary skills, knowledge, or experience to perform that
process (or group of processes) and “other inputs” that the organised
workforce could develop or convert into outputs.
Those other inputs could include-
i) Intellectual property that could be used to develop a good or
service;
ii) there economic resources that could be developed to create
outputs; or
iii) Rights to obtain access to necessary materials or rights that
enable the creation of future Outputs.
2) If a set of activities and assets has outputs at the acquisition date,

an acquired process (or group of processes) shall be considered
substantive if, when applied to an acquired input or inputs, it-
a) Is critical to the ability to continue producing outputs, and the inputs
acquired include an organized workforce with the necessary skills,
knowledge, or experience to perform that process (or group of
processes); OR
b) Significantly contributes to the ability to continue producing outputs
and-
i) Is considered unique or scarce; or
ii) Can-not be replaced without significant cost, effort, or delay in
the ability to continue producing outputs.
24.4
INDAS 103
1) How we calculate Goodwill in a Business Acquisition
Let’s understand it PC + NCI – 100% Net Identifiable Assets Acquired
in a simple manner
with the help of 2) Why we record Goodwill?
some Examples Consideration Discharged in more than Identifiable Net Assets
acquired. We can say that whatever we have paid more than INA.
It is being paid for the process of Business where we can expect
Future Economic Benefits.
Such Process shall be recognized in the name of Goodwill.
(a) Acquired a Running Business
Yes, it is Business Acquisition (because it has Input,
Subst. Process & Output)
(b) Acquired a Manufacturing Unit with Skill Work Force
but Operation not yet started.
Yes, if Subst. Process acquired even though Output is not
available (inputs & Subst. Process)
(c) Acquired an under Constructed Factory Building ( No
workforce is yet appointed)
Its an Asset Acquisition
Concentration Instead of assessing whether you have inputs, substantive process and
Test all other features of business, INDAS 103 introduced new
simplification option for you: Yes it is Optional not mandatory.
The principal question in this test is:
Is substantially all of the fair value of the GROSS assets concentrated
in a single identifiable asset or group of similar identifiable assets?
· If YES, then it is NOT a business. Work done.
· If NOT, then you can't really make a conclusion and have no
choice but assess inputs, processes, outputs and other features
of business as I shortly described above.
Following conditions should be present to meet concentration test:
· Assess GROSS assets, not net assets. The reason is that
liabilities (like loans, payables) are not really relevant to
assessing whether you are acquiring a business or not.
· Ignore cash and cash equivalents, deferred taxes and goodwill.
· In the calculation of FV of gross assets, include any
consideration transferred (plus FV of NCI and previously held
interest) IN EXCESS of FV of net assets acquired.
· Similar assets have similar risk characteristics. Consider their
nature and risks.
· Assets that are NOT similar are: tangible/intangible; different
24.5
INDAS 103
classes of tangible assets; different classes of intangibles;
financial/non-financial; different classes of financial assets,
assets with different risk characteristics.
· If the assets are attached and cannot be separated without
significant cost, then they are considered a single asset.
There are three Step process for concentration test:
a) Measure the Fair Value of Gross Assets acquired.
b) Identify the single identifiable assets or group of similar identifiable
asset.
Determine if substantially all of the value determined in point (a) is
concentrated in the value determined in point (b) then it is an asset
acquisition otherwise needs to assess business definition as per Ind AS
103.
How to Calculate Alternative I:

Fair value of gross assets shall be determined as follows (i + ii – iii):
Fair Value of Gross
I) Fair value of consideration transferred (including fair value of non-
Assets? controlling interest and fair value of previously interest held)
ii) Fair value of liabilities assumed (excluding DTL).
iii) Cash and cash equivalent and deferred tax assets and goodwill
resulting from DTL.
Alternative II: (i + ii)

I) Add up the gross assets like all tangible assets, intangible assets,
current assets, investments etc
II) FV of Consideration Paid by Aquirer as deducted by FV of net
Assets acquired
24.6
INDAS 103
Example: - 1
PC = 100 Cr.
Acquired Business of other entity having Net Assets as Under
Land & Building = 95 Cr.
Vehicle / Furniture / Debtors = 4 Cr.
Solution:
95 /100 x 100 = 95%
PC is Substantially Concentrated towards Land Only i.e., More than 90%
Concentration test is passed
Concentration Test: How to Check?

Value of Single Asset* / Gross Value of Assets x 100
If 90% or More, then treat test is passed
*Either Single Asset (or) Similar Asset (or) Grp of Assets (Dependent)
Example: 2
PC given 120 Cr.
Net Assets Acquired includes: -
Land = 95 Cr
Other Assets = 5 Cr
Cash & Bank Balance = 20 Cr
Net PC = 100 Cr
Gross Asset:
Purchase Consideration Discharges (Outflow)
+ NCI (Outflow)
+ Liabilities assumed (Outflow)
- Cash & Cash Equivalent (Inflow)
- DTA (Inflow)
= Gross Assets
Cost of Control:
Investment (PC)
+ FV of Previous Investment
+ NCI
(-) Net Asset
= Goodwill
PC + NCI = Net Asset

PC + NCI = Asset – Liabilities
PC + NCI + Liabilities = Assets
24.7
INDAS 103
PC + NCI + Liabilities = Cash / Bank, DTA & Other All Assets
PC + NCI + Liabilities - Cash / Bank – DTA = Other Assets
PC + NCI = Net Assets + Goodwill
PC + NCI + Liabilities = Assets + Goodwill
PC + NCI + Liabilities - Cash / Bank – DTA = Assets excluding Cash / Bank & DTA + Goodwill
Example: - 3
Purchase Consideration = 5,00,000
+ NCI =0
+ Liabilities = 44,00,000
- Cash / Bank = (1,00,000)
- DTA = (1,50,000)
Gross Assets = 46,50,000
Single Main Asset (Building) = 31,00,000
Concentration Test = 31,00,000 / 46,50,000 x 100 = 66,67%
Test Fails
Example: 4
Entity A holds 20% interest in Entity B. Subsequently Entity A, further acquires 50% share in
Entity B by paying 300 Crores.
The fair value of assets acquired and Liabilities assumed are as follows:
Building - 1000 Crores
Cash and Cash Equivalent - 200 Crores
Financial Liabilities - 800 Crores
DTL - 150 crores
Fair value of Entity B is 400 Crores and Fair value of NCI is 120 Crores (400 x 30%)
Fair value of Entity A's previously held interest is 80 Crores (400 x 20%)
Entity A needs to determine whether acquisition is an asset acquisition as per concentration
test.
i) Fair value of consideration transferred (including fair value of non-controlling interest
and fair value of previously interest held) = 300 + 120 + 80 = 500 Crores
ii) Fair value of liability assumed (excluding deferred tax) = 800 crores
iii) Cash and cash equivalent = (200) crores.
Fair value of gross assets acquired 1100 Crores.
In the above scenario, substantially all fair value of gross assets acquired is concentrated in a
single identifiable asset i.e. building. Hence it should be asset acquisition. (1,000 / 1,100 = 91% of
value of gross assets is concentrated into single identifiable asset i.e. building). A Judgement is
required to conclude on the word substantially as the same is not defined in the standard.
In our view we have considered 91% of the value as substantial to conclude the above transaction
as asset acquisition.
24.8
INDAS 103
Example 5
Myntra, large clothing company, wants to expand to the new location. During its research it
discovers an old factory with infrastructure owned by the local company. Current owner
discontinued the production recently. Currently, there are only a few people working in the
factory on the closing works. Myntra decides to buy the factory, but the owner agrees to sell it
only with all its liabilities and assets in entirety.
The Balance Sheet of the factory is as follows:
Particulars Amount
ASSETS:
Non Current Assets
Factory Premise 30,00,000
Plant and Machinery 12,00,000
DTA 1,50,000
Current Assets:
Inventories 2,50,000
Cash and Cash Equivalents 1,00,000
Total Assets 47,00,000

EQUITY & LIABILITIES:
Equity
Share Capital 2,00,000
Other Equity 1,00,000
Current Liabilities 44,00,000
Total Equity & Liabilities 47,00,000
Fair value of the factory building is Rs. 31,00,000. All other assets in factory’s balance sheet are
stated at fair values. Myntra pays Rs. 5,00,000 for the factory in its entirety. Assess whether
Myntra acquired a business or not.
Solution
Perform a concentration test first.
We need to calculate fair value of gross assets.
There are two ways of calculating it:
1. Add up gross assets (and excess of consideration paid over FV of net assets):
· FV of a building: 31,00,000 plus
· FV of P&M: 12,00,000; plus
· FV of inventories of 2,50,000; plus
· FV of + consideration paid: 5,00,000; less FV of Net Assets acquired Rs. 3,00,000
(being the equity) plus Rs. 1,00,000 (being FV of building of 31,00,000 less book value of
building of 30,00,000) i.e. Rs. 4,00,000
· Total: Rs. 46,50,000
24.9
INDAS 103
Remember – you ignore cash and deferred taxes (and goodwill, but there is none).
2. Adjusting liabilities and consideration paid:

· Consideration paid: Rs. 5,00,000; PLUS
· FV of liabilities: Rs. 44,00,000; LESS

· Cash acquired: Rs. 1,00,000; LESS
· Deferred tax asset acquired: Rs. 1,50,000
· Total: Rs. 46,50,000
OK, so the fair value of gross assets acquired is Rs. 46,50,000; and it is mainly concentrated in
building and P&M. However factory building and P&M are NOT similar assets, because they
represent different classes of property, plant and equipment.
The question is whether the P&M can be removed from the factory without significant cost. If
not, then the factory and its equipment would be considered a single asset for the purpose of this
test and the concentration test would be met.
Let's assume this is not the case.

As a result, the concentration test is NOT met, the fair value is NOT concentrated in a single
asset (or group of similar assets) and as a result, Myntra must assess inputs, processes and
outputs in order to conclude whether the acquired activities and property are a business or not.
First of all, does the set of activities and assets have output?
No, it does not, because the factory has been recently closed.
Therefore, if it does not have an output, we need to see whether there is a substantive process
present.
There is a workforce (a few employees working on the closing of factory), but there are no other
inputs that workforce develops or converts into output.
The workforce there only works on the closure.
Thus Myntra can conclude that it acquired assets, not a business (no consolidation, but the asset
acquisition).
24.10
INDAS 103
2. SCOPE OF INDAS 103
· Recognizes and measures the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree;
· Recognizes and measures the goodwill acquired in the business combination, or a gain
from a bargain purchase;
· Determines what information to disclose about the business combination.
24.11
INDAS 103
3. WHAT TO DO NOW WHEN THE TRANSACTIONS OF
BUSINESS COMBINATIONS ARISE?
Apply 'ACQUISITION METHOD'.….. This method has 4 steps:

a) Identifying the Acquirer - the entity that obtains the control of another entity (will be
discussed under IndAS 110 later)
Note:
In order to ascertain control do not look at the voting rights only. Evaluate other factors also
like board control, potential voting rights etc.
Example 6:
Company P Ltd., a manufacturer of textile products, acquires 40,000 equity shares of Company
X (a manufacturer of complementary products) out of 1,00,000 shares in issue. As part of the
same agreement, the Company P purchases an option to acquire an additional 25,000 shares. The
option is exercisable at any time in the next 12 months. The exercise price includes a small
premium to the market price at the transaction date.
After the above transaction, the shareholdings of Company X's two other original shareholders
are 35,000 and 25,000. Each of these shareholders also has currently exercisable options to
acquire 2,000 additional shares. Assess whether control is acquired by Company P.
Solution
In assessing whether it has obtained control over Company X, Company P should consider not
only the 40,000 shares it owns but also its option to acquire another 25,000 shares (a so-called
potential voting right). In this assessment, the specific terms and conditions of the option
agreement and other factors are considered as follows:
Ÿ the options are currently exercisable and there are no other required conditions before such
options can be exercised
Ÿ if exercised, these options would increase Company P's ownership to a controlling interest of
over 50% before considering other shareholders' potential voting rights (65,000 shares out
of a total of 1,25,000 shares)
Ÿ although other shareholders also have potential voting rights, if all options are exercised
Company P will still own a majority (65,000 shares out of 1,29,000 shares)
Ÿ the premium included in the exercise price makes the options out-of-the-money. However,
the fact that the premium is small and the options could confer majority ownership indicates
that the potential voting rights have economic substance.
Ÿ By considering all the above factors, Company P concludes that with the acquisition of the
40,000 shares together with the potential voting rights, it has obtained control of Company
X.
24.12
INDAS 103
b) Determining the Acquisition date - the date on which it obtains control of the acquiree
Note:
(i) The date on which the acquirer obtains control of the acquiree is generally the date on which
the acquirer legally transfers the consideration, acquires the assets and assumes the
liabilities of the acquiree—the closing date.
(ii) On Acquisition date – Consideration, Identifiable Net Assets, Non-Controlling Interest &
Goodwill/Gain on bargain purchase is to be measured or determined.
(iii) If any approval of regulating authority is required for business combination then the date of
obtaining approval may be considered as DOA.
Example 7:
Company A acquired 80% equity interest in Company B for cash consideration. The relevant dates
are as under:
ü Date of shareholder agreement 1st April, 20X1
ü Appointed date as per shareholder agreement 1st June, 20X1
ü Date of obtaining control over the board representation 1st July, 20X1
ü Date of payment of consideration 15th July, 20X1
ü Date of transfer of shares to Company A 1st August, 20X1
In this case, as the control over financial and operating policies are acquired through obtaining
board representation on 1st July, 20X1, it is this date that is considered as the acquisition date.
It may be noted that the appointed date as per the agreement is not considered as the acquisition
date, as the Company A did not have control over Company B as at that date.
c) Recognizing and Measuring the identifiable assets acquired, the liabilities assumed and
any non-controlling interest in the acquiree;
d) Recognizing and Measuring Goodwill or a Gain from a Bargain Purchase.
Acquisition method
Identify the Determine the Recognize Assets, Recognize

Acquirer Acquisition Liabilities and Goodwill
Date Non-Controlling or GBP
Interest
24.13
INDAS 103
SUMMARIZING THE ABOVE BASICS:
WE NEED FOUR ELEMENTS FOR SOLVING QUESTION

Consideration (PC) Fair Value of Value of NCI as Value of Goodwill
or Investment 100% Net Assets on DOA & or Gain from
made by Parent co. as on DOA & Again NCI is to be Bargain Purchase
only on DOA Again 100% Net recalculated as on only on DOA
Assets as on Consolidation Date
Consolidation Date for preparing BS
for preparing BS
I. Cash: Here Net Assets NCI can be calculated Goodwill/GBP will be

i. immediate Means – by any of the following Different when Non-
(a) Equity Capital two approaches- Controlling interest
ii. Deferred valued at:
(b) Balance of (a) Fair Value
II. Other than Cash Other equity as Or a) Net Asset:
(Eg. Debentures, on DOA (b) Proportion of Proportionate
other Net Assets Goodwill
securities) Other equity means
Profits accumulated by Qualifying NCI either b) Fair Value: Full
III. Contingent any name. at FV or Prop. Of Net Goodwill (preferred)
Consideration Assets
Goodwill is subject to
Non-qualifying NCI at
IV. Step Acquisition FV Impairment under Ind
AS 36, but not
amortization.
24.14
INDAS 103
4. WHAT IS PURCHASE CONSIDERATION UNDER BUSINESS
COMBINATION?
Fair Value of Assets given on acquisition date - XXX

Fair Value of Liabilities incurred by acquirer - XXX
Fair Value of equity shares issued by acquirer - XXX
Fair Value of Deferred Consideration (at PV) - XXX [see note (i) below ]
Fair Value of Contingent Consideration (at PV) - XXX
(i) Difference between the actual consideration to be paid and the Fair value of Consideration
recognized on acquisition date or any change after 1st recognition will be transferred to Profit
and Loss as Finance Cost every year.
(ii) Acquisition related costs incurred by an acquirer to effect a business combination are not part
of the consideration transferred, for example –
(a) STAMP DUTY payment on acquisition of Land pursuant to business combination shall not be
capitalized and treated as acquisition related cost – to be expensed off.
(b) Any Payment to the regulator of acquiree to run license.
Author's Note –
1. Any Transaction cost incurred on Business Combination shall be directly transferred to
Profit and Loss account.
2. If Contingent Consideration is based on Employement Service then it is not to be a Part of

PC and fully treated as Post Business Combination Expense in Profit and Loss Statement of
Acquirer if Paid.
24.15
INDAS 103
Example 8:
B Ltd. has 1,00,000 no. of equity shares outstanding
A Ltd. acquired 72,000 equity shares of B Ltd. (FV per share of B Ltd. is 36/-)
Consideration would be discharged in the form of cash of Rs. 5,00,000 immediately & 1 Equity
Share of A Ltd. for Every 2 shares acquired (FV per share of A = 60/-)
In addition to above, A Ltd. will pay 6,00,000/- in cash after 1 year (Cost of Capital is 10%)
Calculate Purchase Consideration as on Date of Acquisition
Solution:
Calculation of Purchase Consideration: -
Consideration in form of Amt
1) Equity shares of A Ltd (72,000/2 x 1) x 60/- 21,60,000
2) Cash Immediate 5,00,000
3) Deferred Cash at PV 6,00,000/1.1 5,45,455
Purchase Consideration 32,05,455
FV of NCI of B Ltd:
(1,00,000 – 72,000) x 36
= 10,08,000
SFS of A Ltd: (Journal Entry for Acq)

DOA = Investment in B Ltd Dr. 32,05,455
To ESC / SP A/c 21,60,000
To Def. Cash Payable A/c 5,45,455
After 1 Year:
(5,45,455 x 10%) = 54,545/-
a) Interest Cost A/c* Dr. 54,545
To Def. Cash Payable A/c 54,545
b) Def. Cash Payable A/c Dr. 6,00,000
*Not a part of Investment charges to P&L of Acquirer.
24.16
INDAS 103
5. NON-CONTROLLING INTEREST
Meaning - The Equity in a Subsidiary
(a) Not Attributable directly or indirectly
(b) To a Parent
i.e. when parent owns less than 100% of the equity of acquiree.
Presentation of NCI – Separately in the CFS of parent.
Measurment of NCI - IndAS 103 requires measuring NCI as per the following methods:
Method – 1
Fair value of shares held by NCI also known as Full Goodwill method
A Limited acquires 80% shares of B Limited whose NA are Rs 140.00 crores by payment in cash of
Rs 120.00 crores. The value of non–controlling interest is Rs 30 crores.
NCI = 120/80% x 20% = 30 Cr.
Method – 2
'Proportionate Share in Net Assets method also known as Partial Goodwill
Continuing with the above example in method 1-
Assume that the value of recognized amount of subsidiary identifiable net assets is Rs 140.00
crores, as determined in accordance with Ind AS 103. The value of non–controlling interest is Rs
28.00 crores (i.e. Rs 140 crores x 20%).
Types of NCI –
Meaning Qualifying NCI Non-Qualifying NCI

Present ownership interest and All other components of NCI
entitles its holders to a proportionate
share in the Net Assets
Ordinary Equity Shares Equity component of
Examples
Preference Shares entitled to a pro- convertible debt and other
rata share of net asset upon compound financial instruments
liquidation Share warrants
Options under Share based
payments
Measurement Option 1 – At the Fair Value At Fair Value only unless

of NCI of the NCI another measurement basis is
Option 2 – Proportionate share of Net required by Ind-AS.
Assets acquired Eg. SBP options of NCI are
measured as per IndAS 102
24.17
INDAS 103
Qualifying NCI (Important Note):
Ø When FV per share of acquiree is given in the question then use FV Method.
Ø When question requires NCI to be measured at FV – then FV of NCI shall be computed based
on the price per share paid by parent (acquirer) for acquiring the control at DOA
Ø When FV is not given or question doesn't requires to calculate as per FV – then use
Proportionate share of Net Assets acquired.
Negative NCI – NCI can be negative also when Net Assets acquired are negative (i.e. Assets are
less and Liabilities are more)
24.18
INDAS 103
6. CALCULATION OF GOODWILL OR GAIN ON BARGAIN
PURCHASE
(A) Goodwill or Gain from Bargain Purchase shall be calculated as under:
Cost of Investments (FV of Consideration transferred) XXXX

Add: XXXX
Fair Value of Previous Equity Interest (in case of Multiple
Acquisition)
Add: XXXX
Non-Controlling Interest as per above two methods
Less: XXXX
Identifiable Net Assets of acquiree at Fair Value on DOA
Goodwill or Gain from Bargain Purchase XXXX
Gain on Bargain Purchase - Ind AS 103 requires that the bargain purchase gain should be
recognised in OCI and accumulated in equity as capital reserve. If there is no clear evidence for the
underlying reason for classification of the business combination as a bargain purchase, then it
should be recognised directly in equity as capital reserve.
Goodwill shall be presented in Consolidated Balance Sheet separately from Other Intangible
Assets.
Carve Out –
IFRS 3 requires the entity to recognize Gain on Bargain Purchase to Profit or Loss A/c and not
through OCI.
So basically from the above understanding of Consideration, NCI and goodwill we can conclude
that, for consolidation of FS we need following elements:
a. Identifiable Net Assets
b. NCI
c. FV of Consideration transferred to acquire Control
d. Goodwill or Capital Reserve (Gain on bargain purchase)
(B) How to solve the question when acquisition of control (DOA) is made during
the year and balances of other equity (for the purpose of calculating Net
Assets as on DOA) are not given on the same date?
Assume Profits (Other Equity) are accrued evenly throughout the year except when there are –
24.19
INDAS 103
(a) Abnormal Items
(b) Non-Recurring Items
And Prepare “Statement of Changes in Net Assets”

Particulars Net Assets as Changes during Total Balance
on DOA the period as on CFS date
Balance of Share Capital
+ Balance of other equity
(profits)
+/- Abnormal Items; Non XXX
recurring items or Errors
+ Dividend paid during the XXX
year or Dividend of CY
declared in CY &
Entry passed.
= Balances
+/- Time Adjustment
(assume evenly accrued)
**Time adjustment is
done on Profit after Tax
before any distributions
eg. dividend
= Balances after Time
Adjustment
+/- Restate Abnormal Items
- Pref. Dividend
+/- Revaluation of Assets
/Liabilities along with
Depreciation if any
+/- DTA/DTL on above
revaluation
- Elimination of Unrealized
Profit & DTA thereof
Final Balance
· Take Net Assets as on DOA as 100% for the purpose of calculating Goodwill/GBP
· Apportion the Change column between Parent's Share and NCI's Share
24.20
INDAS 103
Example 9: - (Net Asset FV)
Balance Sheet of Acquiree as on 31/3/23
Particular Amt
PPE 80,00,000
Current Asset 30,00,000
1,10,00,000
Equity share capital 40,00,000
35,00,000
1,74,50,000
Date of Acquisition is 31/3/23. Tax Rate us 30%

FV of PPE on DOA is 90 lakhs, CA in CFS
Calculate FV of Net Assets
Solution:
Approach 1-
Particular Amt
PPE 90,00,000
+Current Asset 30,00,000
(-) Liabilities (35,00,000)
(-) DTL on Business Combination 3,00,000
FV of Net Assets 82,00,000
Approach 2-
Statement of Net Assets/Equity: -
Particular Amt
Equity Share Capital 40,00,000
+ Revaluation Gain 10,00,000
(-) Revaluation Surplus due to DTL (3,00,000)
FV of Net Assets 82,00,000
24.21
INDAS 103
EXAMPLE 10: -
Balance Sheet of A Ltd. & B Ltd. as on 31/3/23
A B
Equity share capital of Rs. 10 Each 50,00,000 30,00,000
Other Equity 30,00,000 25,00,000
Liabilities 40,00,000 20,00,000
1,20,00,000 75,00,000
Investment in B Ltd. (100%) 60,00,000 -
All Other Assets 60,00,000 75,00,000
1,20,00,000 75,00,000
Date of Acquisition is 31/3/23

Fair Value of Assets of B on 31/3/23 is 80 Lakhs. Show Business Combination A/c & Prepare
CFS.
Solution
1) NCI is Nil
2) Date of Acquisition is 31/3/23
(a) Purchase consideration (investment made by Acquirer) = 60,00,000
(b) Fair Value of Net Assets
Assets 80,00,000
(-) Liabilities 20,00,000
Fair Value of Net Assets 60,00,000
(c) NCI = 0
(d) Goodwill / Gain on Bargain Purchase
Purchase Consideration (Investment) 60,00,000
(-) 100% NA Acquired 60,00,000
0
Journal Entry (in CFS of Acquirer i.e., A Ltd.)

Net Assets A/c Dr. 60,00,000
Consolidated Balance Sheet of GRP as on 31/3/23

Assets (60+80) 1,40,00,000
1,40,00,000
Equity Share Capital (10/-) 50,00,000
Liabilities (40+20) 60,00,000
1,40,00,000
24.22
INDAS 103
Example 11: -
Balance Sheet of A Ltd. & B Ltd. as on 31/3/23
A B
All Other Assets 90,00,000 75,00,000
Investment in B Ltd. (90%) 50,00,000 -
1,40,00,000 75,00,000
Equity share capital (10/-) 40,00,000 30,00,000
Other Equity 50,00,000 15,00,000
Liabilities 50,00,000 30,00,000
1,40,00,000 75,00,000
On 31/3/23, A Ltd made investment in B Ltd. BV of NA of B are equal to FV.

Apply INDAS 103 & 110 (MP of Equity Share of B = 16)
Solution
Date of Acquisition = 31/3/23
1) PC = 50,00,000
2) 100% of Net Assets at FV = 45,00,000
3) NCI (outside SH of B Ltd)
(a) Proportionate share in FV of N.A.
45,00,000 x 10%
= 4,50,000
(b) FV Method
Alternate 1:
30,00,000 x 10%
30,000 No. x MP (i.e.,) 16
4,80,000
If MP is missing but we want to calculate NCI through FV method only, Then

Alternate 2:
Investment by A (90%) = 50,00,000
50,00,000/90 x 10
5,55,555
4) Goodwill/Gain on Bargain Purchase:
Journal entries in CFS:
Net Assets A/c Dr. 45,00,000
Goodwill A/c Dr. 9,50,000
To NCI A/c 4,50,000
24.23
INDAS 103
Cost of Control (COC)
Investment 50,00,000+
NCI 4,50,000
54,50,000
(-) 100% Net Assets 45,00,000
Goodwill 9,50,000
Consolidated Balance Sheet
Particular Amt
Assets (90+75) 1,65,00,000
Goodwill 9,50,000
1,74,50,000
Equity share capital (10%) 40,00,000
NCI 4,50,000
Liabilities (50+30) 80,00,000
1,74,50,000
Example 12: -
FY 23-24, Date of Acquisition is 1/9/23
ESC of Acquiree is Rs. 20 lakhs Outstanding for Whole Year
Balance of Other Equity as on 1/4/23 was Rs. 15 Lakhs & as on 31/3/24 was Rs. 27 Lakhs
During the Year there was a abnormal loss of Rs. 54,000 in the month of October.
80% Investment made by Acquirer is Rs. 30 Lakhs
Calculate Goodwill/Gain on Bargain Purchase also share of Acquirer in Post-Acquisition Period
Profit.
Solution:
Statement of Changes in Net Assets
Particulars DOA Position Changes after DOA Balance Sheet

1/9 (1/9 - 31/3)
Equity Share Capital 20,00,000 - 20,00,000
Other Equity 15,00,000 12,00,000 27,00,000
+ Abnormal Loss - 54,000
35,00,000 12,54,000
+/- Time Adjustment 5,22,500 (5,22,500)
for 5 Months
40,22,500 7,31,500
- Abnormal Loss - (54,000)
24.24
INDAS 103
40,22,500 6,77,500
100% Net assets Parent - 80% = 5,42,000
as on 1/9 NCI - 20% = 1,35,500
Cost of Control: -
Investment as on DOA 30,00,000

+ NCI as on DOA (Proportion of NA) 8,04,500
38,04,500
(-) 100% Net Assets as on DOA 40,22,500
Gain from Bargain Purchase 2,18,000
24.25
INDAS 103
7. TREATMENT OF DIVIDEND
1) Dividend is Declared generally in AGM in next FY.
2) That means if Dividend is paid by Acquiree in CY, it must have been declared in Cy only
3) Journal Entry by Acquiree

a) Declaration –
P&L A/c Dr.
To Dividend Payable A/c
b) Payment –
Dividend Payable A/c Dr.
To Bank A/c
4) If dividend is Paid after DOA, then Acquirer much be eligible for this. However, if Dividend
is paid before DOA, Acquirer is not eligible.
5) If Acquirer is eligible for Dividend, then it must include it in its P&L A/c
6) While making Time Adjustment Calculation in SCNA, Profit must be After Tax & Before any
Dividend or Other Appropriate
7) Therefore, if Dividend is Declared/Paid during the year, it needs to be added back in

Changes Column to determined Profit before Dividend. Let’s understand the same below:
a. Add back in the statement of Net Assets (in change column) just to make proper time
adjustment.
b. Apply Time adjustment
c. Deduct the proportionate dividend directly from parent's P&L and remaining dividend
directly from NCI directly
24.26
INDAS 103
Example 13: -
1/4/23 = other Equity = 6,00,000
1/6/23 = DOA 70% of Investment = 15,00,000
1/8/23 = Dividend Payable = 1,50,000
31/3/23 = Equity Share Capital = 12,00,000 & Other Equity = 9,00,000
Based on Above information, Following conclusion can be drawn: -

1) CY Profit of S is not 3,00,000 (9-6) it is 3,00,000 + 1,50,000 (Dividend) = 4,50,000 & Time
Adjustment is to be made for 4,50,000
2) Since Dividend is paid after 1/6 (i.e., DOA) Parent must have received Proportionate share
in Dividend i.e., 1,05,000/-
3) Parent must have already Credited its P&L A/c (other Income) by 1,05,000 in SFS.
4) NCI must have also received it on 1/8 as its Proportionate Share i.e., 45,000
5) Since DOA is 1/6 which is before Dividend declared & paid i.e., 1/8
Therefore 100% Net Assets position as on DOA must be before Dividend impact.
i.e., Net Assets as on DOA should not reflect Dividend effect
Date Of Acquisition: 1/6/23

Purchase Consideration = 15,00,000
100% Net Assets (SCNA) = 18,75,000
NCI (30% of NA) = 18,75,000 x 30% = 5,62,500
Goodwill = 1,87,500
SCNA: -
1/6 (1/6 - 31/3)
Other Equity 6,00,000 3,00,000 9,00,000
+ Dividend Paid - 1,50,000
18,00,000 4,50,000
+/- Time Adjustment 75,000 (75,000)
for 2 Months
NA as on DOA 18,75,000 3,75,000
100% Net assets Parent - 70%
as on DOA = 2,62,500
NCI - 30% = 1,12,500
24.27
INDAS 103
Working Note: NCI
NCI as on DOA 5,62,500
(+) Post Acquisition Share in Acquiree's Profit 1,12,500
6,75,000
(-) Paid Dividend (45,000)
6,30,000
Working Note: Consolidated Other Equity of Parent Company
R&S Balance in SFS xxx

Post-Acquisition Share from acquiree 2,62,500
(-) Dividend already received (1,05,000)
Example 14: -
Investment Cost = 15,00,000 @80%
1/4/23 31/3/24
Equity Share Capital (Sub.) 8,00,000 8,00,000
Other Equity (Sub.) 9,00,000 12,00,000
Dividend paid by Sub. 90,000 on 1/7/23.

Calculate SCNA / NCI / COC / Other Equity.
Solution
1)SCNA

Other Equity 9,00,000 3,00,000 12,00,000
+ Dividend Paid (90,000) 90,000
16,10,000 3,90,000
+/- Time Adjustment 1,30,000 (1,30,000)
NA as on DOA 17,40,000 2,60,000
100% Net assets Parent - 80% =
as on DOA 2,08,000
NCI - 20% = 52,000
2)NCI: -
NCI (DOA) = 3,48,000
+ Post Acquisition Share = 52,000
= 4,00,000
24.28
INDAS 103
3) Cost of Control: -
Investment 15,00,000
+ NCI 3,48,000
(-) 100% Net Assets (17,40,000)
Goodwill 1,08,000
4) Consolidated Other Equity: -

Parent/Balance xxx
+ Post Acquisition Share 2,08,000
2,08,000
** No Dividend Reduction on Parent has not received it.
Example 15: -
Treatment of Preference Share Capital & Preference Dividend in Subsidiaries)
Balance Sheet as on 31/3/24
P E
Equity share capital 15,00,000 9,00,000
9% Preference Share Capital 6,00,000 5,00,000
Other Equity 10,00,000 8,00,000
Liabilities 9,00,000 8,00,000
40,00,000 30,00,000
PPE 14,00,000 20,00,000
Investments:
In Equity Shares (60%) 8,00,000
In Preference Shares (30%) 2,00,000
All Other Assets 16,00,000 10,00,000
40,00,000 30,00,000
1) Both Investment were acquired on 1/4/23

2) Preference Dividend is declared by Subsidiary on 31/3/24. But no entry is yet passed
by both.
3) Equity dividend is paid on subsidiary on 1/10 @12%
4) Balance of other equity of subsidiary as on 1/4/23 = 5,00,000
Show important workings & Prepare CBS.
24.29
INDAS 103
Solution:
Working Note 1: SCNA
1/4/23 12 Months 31/3/24
Other Equity 5,00,000 3,00,000 8,00,000
+ Equity Dividend Paid - 1,08,000
+ Preference Dividend - -
Paid (No need to
addback as entry not
passed)
(-) Preference Dividend - (45,000)
(-) Preference Dividend 14,00,000 4,08,000
14,00,000 3,63,000
100% Net assets Parent - 60% =
as on DOA 2,17,800
NCI - 40% = 1,45,200
Working Note 2: - (NCI including Preference Share Capital)

NCI (40% of Net Assets as on DOA) 5,60,000
+ Proportionate 70% Preference Share Capital 3,50,000
+ Share in Post-Acquisition Profit 1,45,200
(-) Dividend Equity Received (1,08,000 x 40%) (43,200)
TOTAL NCI 1,12,000
**Excluding Preference Share Dividend, It should be separately shown in CBS “Other Current
Liabilities”.
Working Note 3: - Cost of Control Investment

Equity 60% 10,00,000
Preference 30% 9,10,000
19,10,000
(-) 100% Net Assets: 14,00,000
100% Pref. Share Capital: 5,00,000 (19,00,000)
Goodwill 10,000
Working Note 4: - Other Equity Balance
Balance with Parent in SFS 10,00,000
+ Post Acquisition Share in Subsidiary Profit 2,17,800
- Dividend Equity (64,800)
11,53,000
24.30
INDAS 103
+ Preference Dividend Income 30% 13,500
11,66,500

PPE 34,00,000
Goodwill 10,000
Other Current Asset 26,00,000
60,10,000
9% Preference Share Capital 6,00,000
NCI 10,12,000
Liabilities 17,00,000
Net Dividend Payable (Preference) 31,500
60,10,000
Example 16 -
From the above example 15, but the Date of Acquisition is 1/10
Solution:
Working Note 1: SCNA

1/4/23 12 Months 31/3/24
Other Equity 5,00,000 3,00,000 8,00,000
+ Equity Dividend Paid - 1,08,000
+ Preference Dividend - -
Paid (No need to
addback as entry
not passed)
14,00,000 4,08,000
(+/-) Time Adjustment 2,04,000 (2,04,000)
for 6 Months
16,04,000 2,04,000
(-) Preference (22,500) (22,500)
Dividend
15,81,500 1,81,500
as on DOA = 1,08,900
NCI - 40% = 72,600
24.31
INDAS 103
Working Note 2: NCI including Preference Share Capital
NCI (40% of Net Assets as on DOA) 6,32,600
+ Proportionate 70% Preference Share Capital 3,50,000
+ Share in Post-Acquisition Profit 72,600
(-) Dividend Equity Received (1,08,000 x 40%) (43,200)
10,12,000
Working Note 3: Cost of Control

Investment in both 10,00,000
+ NCI as on DOA 9,82,600
19,82,600
(-) 100% Net Assets: (20,81,500)
Equity Share Capital : 15,81,500
100% Pref. Share Capital : 5,00,000
CAPITAL RESERVE 98,900
Working Note 4: Other Equity Balance
Balance with Parent in SFS 10,00,000

+ Post Acquisition Share in Subsidiary Profit 1,08,900
- Dividend Equity (64,800)
+ Preference Dividend Income 30% 13,500
10,57,600
PPE 34,00,000
Other Current Asset 26,00,000
60,00,000
9% Preference Share Capital 6,00,000
Other Equity: 10,57,600 11,56,500
CR: 98,900
NCI 10,12,000
Liabilities: 17,00,000 17,31,500
31,500*
60,00,000
*Payable to NCI (Preference Dividend)
24.32
INDAS 103
8. FAIR VALUE OF IDENTIFIABLE NET ASSETS
(REVALUATION)
Concept-
Identifiable Net Assets are always considered at Fair Value as on Date of Acquisition to calculate
correct Goodwill or GBP, Since Purchase Consideration is by default at Fair Value (obviously if
purchased from market then PC would be at Fair Value), therefore Net Assets should be taken at
Fair Value for proper comparison.
Following Steps should be kept in mind if Separate Fair Values of Net Assets are given in the
question:
1. Calculate Revaluation Profit/loss on the date of acquisition along with its Tax effect (i.e.
DTL/DTA) – This shall be adjusted in the Net Asset as on acquisition date under “statement of
Net Assets” in Pre-acquisition column.
2. Calculate Additional Depreciation/Saving in Depreciation due to revaluation of NA, and it shall
be adjusted in the post-acquisition net assets along with its tax effect (i.e DTA/DTL)
How to Calculate Depreciation Effect on Revaluation of Assets:

Depreciation that should be charged on Fair Value of PPE as on DOA till Date of XXX
Consolidation
Less - Actual Depreciation charged in Books from DOA to Date of Consolidation XXX
Balancing Figure would be Additional Dep or Saving in Dep. XXX
3. In case of revaluation of Current Assets (like inventory or debtors) – if such CA are settled or
realised during post-acquisition period, then above revaluation effect shall be reversed in the
post-acquisition period of statement of NA along with Tax effect.
If such CA are still o/s on balance sheet date (i.e not realised/settled yet) then no need to
reverse the effect.
(In absence of any information, we will assume that Current Assets are still o/s on BS date)
24.33
INDAS 103
Example 17: - (Fair Valuation of PPE)
Balance Sheet of Acquiree as on 31/3/24
PPE (After 10% Depreciation) 13,50,000

21,00,000
Equity Share Capital (10/-) 12,00,000
21,00,000
90% Investment Acquired by Acquirer on 1/7/23 at Cost of 12,58,000

Other Equity Balance of Acquiree as on Beginning of Year is 90,000. Tax Rate 25%. Market Value
of PPE on 1/7/23 is 16,00,000
Solution:
Working Note - 1:
a) PPE as on 31/3 (BV) = 13,50,000
b) PPE as on 1/4 (BV) (10% Depreciation) = 15,00,000
c) PPE as on 1/7 (BV) (10% Dep for 3 Months) = 14,62,500
d) PPE as on 1/7 (MV) = 16,00,000
e) Fair Value Gain (MV – BV) (d-c) = 1,37,500
Tax Effect:
Current Asset as per CFS (on DOA) = 16,00,000
Tax Base (Value as per Acquiree's Record) = 14,62,500
DTL @25% = 34,375 (to be Created on DOA due to Business Combination it will ultimately affect
Goodwill/GBP)
Working Note – 2:
Depreciation for Post Acquisition Period (i.e., 11/7 to 31/3)
a) Depreciation Charged by Acquiree for Post Acquisition Period (14,62,500 – 13,50,000) =
1,12,500
b) Depreciation that should be charges in CFS for Post Acquisition period on 16,00,000
(16,00,000 x 10% x 9/12) = 1,20,000
c) Excess Depreciation to be charges in CFS = 7,500
DOA Balance Sheet
Date Current Asset (CFS) 16,00,000 14,80,000
Tax Base 14,62,500 13,50,000
1,37,500 1,30,000
O/D DTL (1,37,500 x 25%) 34,375 32,500
Revised DTL (1,30,000 x 25%)
Reversal of DTL = 1,875
24.34
INDAS 103
Working Note 3: Statement of Changes in Net Asset
1/7 (1/7 - 31/3)
Other Equity 90,000 2,10,000 3,00,000
(+/-) Time Adjustment 52,500 52,500
for 3 Months
NA as in DOA 13,42,500 1,57,500
(+/-) Fair Value 1,37,500 (7,500)
Adjustment
(+/-) DT Adjustment (34,375) 1,875
(liab.)
NA as on DOA 14,45,625 1,51,875

as on 1/9 = 1,36,687
NCI - 10% = 15,187
Working Note 4: - Cost of Control

Investment @90% 12,58,000
+ NCI as on DOA 1,44,563
(-) 100% Net Assets (14,45,625)
Gain on Bargain Purchase 43,062
Working Note 5: - NCI

As per Net Asset Proportion 1,44,563
+ Post Acquisition of Shares 15,187
1,59,750
Working Note 6: Consolidated Other Equity

CR R&S
Balance of Parent xxx xxx
+ Shares from Acquiree - 1,36,687
+ GBP 43,062 -
43,062 1,36,687
24.35
INDAS 103
Consolidated Balance Sheet (Extract)
PPE 14,80,000
P xxx
S 13,50,000
+ FV Gain on DOA 1,37,500
- Additional Depreciation (7,500)

P xxx
S 7,50,000
Equity Share Capital of Parent xxx
Consolidated Other Equity 1,79,749
NCI 1,59,750
P xxx
S 6,00,000
24.36
INDAS 103
Student Note:
24.37
INDAS 103
9. STEP ACQUISITIONS
· Step Acquisition means acquiring equity interest in subsidiary at various different dates let's
say acquired first time in the year 2019 @ 20% then acquired another 40% in the year 2020. In
this case, CONTROL is meant to be acquired in the year 2020.
· If it results in acquisition of Control, then Consolidation of FS is must.
· Consolidation begins only from the date of obtaining control.
· Investments held before obtaining control must be revalued (at Fair value) through P&L a/c.
· How to Calculate FV of Previous Investments?
First Preference – FV will be provided in the question
Second Preference – Compute FV based on Price per share paid by Parent in its latest
acquisition (i.e. on DOA of Control)
· Goodwill/Gain on Bargain Purchase shall be calculated only on the date of obtaining control.
We can understand the entire process through following Journal Entries:

1. Revalue previously recognized investment at fair value:
Investments A/c Dr. or P&L A/c Dr.
To P&L A/c To Investment A/c
2. Now Consolidate the subsidiary:

Net Assets (100%) (value as per IndAS 103) Dr. Fair Value
Goodwill Dr. Calculated as above
To Non-Controlling Interest Calculated as per INDAS103
To Bank Consideration
To Investment** (previously recognized) Fair Value
** Previous investment may be Investment in Associate before obtaining control.
Calculation of Goodwill/CR:-
Cost of Investment (further investment when control obtained) --- xxx
+ Fair value of previous equity interest --- xxx
+ Non-Controlling Interest as per above two methods --- xxx
Identifiable Net Assets (FV) of subsidiary on acquisition date --- xxx
24.38
INDAS 103
Investment in Associate Converted into Investment in Subsidiary
1) Initially we had an investment in associate

In CFS we must have applied Equity Method on Such Investment
Equity Method:
Cost on Investment XXX

+ Share in Post-Acquisition P&L XXX
+ Share in Post-Acquisition OCI XXX
+ Share in Post-Acquisition Other Equity XXX
(-) Dividend Received (XXX)
Value of Investment (In CFS) XXXXX
Journal Entries:
Investment A/c Dr.
To Consolidated P&L A/c
To Consolidated OCI A/c
2) Subsequently when Associate is Converted into Subsidiary due to Further Investments.

Equity Method is discontinued and follow INDAS 103
Follow Step Acquisition Method and Measure previous Investment in Associates at FV as
on DOA. Any Accumulated Balances in OCI shall be treated as Follows:
(a) Balance of OCI to the extent allowed as reclassified shall be transferred to
Consolidated P&L A/c
(b) Balance of OCI to the Extent not allowed to be reclassified - shall be directly
transfer to reserve in CFS.
Journal Entry as per INDAS 103:

Net Asset A/c Dr.
Consolidated OCI A/c Dr.
Goodwill A/c Dr.
To Bank A/c
To Investment A/c
To Consolidated P&L A/c
To Reserves A/c
To Consolidated P&L A/c (FV Gain)
24.39
INDAS 103
Example 18: -
Invested 15% in Equity of B Ltd on 1/4/22 @ 5,00,000/-
Total Equity Shares outstanding of B Ltd. id 1,00,000 No.
Invested another 45% in equity of B Ltd on 1/4/23 @25,00,000/-
Market Value of Share of B Ltd. on 1/4/23 is 50/-
100% Net Assets Fair Value of B Ltd.
1/4/22 = 50,00,000
1/4/23 = 60,00,000
NCI Should be at Fair Value
Calculate COC & also discuss treatment of 15% Investment in CFS.
(Parent Follows Cost model under INDAS 27)
Solution:
Cost of Control:
Investment (PC)
1/4/23 – 45 % Equity 25,00,000
1/4/22 – 15% Equity (15,000 x 50) 7,50,000
32,50,000
+ NCI as on DOA (40,000 x 50/-) 20,00,000
(-) 100% Net Assets (60,00,000)
Gain on Bargain Purchase 7,50,000
While calculating GBP as above, we have remeasured 15% Investment @7,50,000 (i.e., FV Gain
of 2,50,000). Its second effect should be credited to P&L of parent & to be reflected in
Consolidated Other Equity of Grp.
24.40
INDAS 103
10. UNREALISED PROFIT/LOSS ON ASSETS/STOCKS
TRANSFERRED WITHIN THE GROUP:
First of all identify the date of Intra Group transaction, if transaction date is before acquisition of
investment then ignore such transaction. If transaction is made on or after the date of acquisition
of control, then follow the below steps:
1. Effect on Consolidated Balance Sheet:

a. Calculate Book value of asset/stock transferred within the group (net of depreciation if
any)
b. Calculate un-realised profit/loss on above book value.
c. If such transaction is upstream (i.e. sale by subsy to parent) then eliminate profit/loss in
statement of Changes in NA in Post-acquisition column with similar effect in
Asset/Stock value.
d. If such transaction is downstream (i.e. sale by parent to subsy) then eliminate the
profit/loss from Consolidated Retained Earnings of Parent with similar effect in
Asset/Stock value)
** If the Loss is irrecoverable (Permanent decline in FV/NRV) then Ignore (no reversal)
2. Effect on Consolidated Profit and Loss Statement:

While combining the incomes and expenses of parent and subsidiary co., make contra adjustment of
intra grp transactions made after date of acquisition.
Under Change in Inventory Head – separately calculate the value of inventory of subsidiary as
follows:
Opening Inventory as on acquisition date (at Fair Value) - xxxx
Less Closing Inventory as on Cons. Date after elimination of UP -xxxx
-----------
Change in Inventory during the post-acquisition period xxxx
Note: DTA/DTL should also be reflected in the above calculations. DTA shall be recognized in
case of elimination of Profit.
24.41
INDAS 103
11. SUMMARY:
Ok! Let us summarize the entire concepts studied till now with some additional points
A) RECOGNITION –
· On acquisition date, recognize all identifiable Assets acquired and Liabilities assumed if they
meet the definition of assets and liabilities as per Framework.
· Those Assets & Liabilities which are not recorded by acquiree in its financial statements -
shall also be recorded if they meet the recognition criteria as per acquirer. For example, the
acquirer recognizes the acquired identifiable intangible assets, such as a brand name, a patent
or a customer relationship, that the acquiree did not recognize as assets in its financial
statements because it developed them internally and charged the related costs to expense.
· Recognition of Contingent Liabilities - the acquirer shall recognize as of the acquisition date a
contingent liability assumed in a business combination if it is a present obligation that arises
from past events and its fair value can be measured reliably even if it is not probable that an
outflow of resources embodying economic benefits will be required to settle the obligation.
Outcome INDAS 37 Business

Combination
Possible obligation Not recognized Not recognized
Present obligation – not probable Not recognized Recognized if reliably
that an outflow of economic Measured
benefits will occur
Present obligation – probable Not recognized Not recognized
that an outflow of economic
benefits will occur, but cannot
be measured reliably
· Indemnification assets - The seller in a business combination may contractually indemnify the
acquirer for the outcome of a contingency or uncertainty related to all or part of a specific
asset or liability. The acquirer obtains an indemnification asset. The acquirer shall recognize an
indemnification asset at the same time that it recognizes the indemnified item measured on the
same basis as the indemnified item, subject to the need for a valuation allowance for
uncollectible amounts. (Record Indemnification Asset only if related Liability is also
Recorded)
24.42
INDAS 103
B) MEASUREMENT OF ASSETS & LIABILITIES –
· Identifiable Assets and Liabilities acquired and recorded shall be measured at FAIR
VALUE as on Acquisition Date.
· NCI shall be measured first on Acquisition date either at (i) Fair Value or (ii)
Proportionate share in the Net Assets of acquire.
· NCI shall be re-measured on every BS Date by any of the above method.
· Income Tax Assets – DTA or DTL shall be measured on Assets and liabilities acquired on
business combination as per INDAS 12 only.
· DBO of Employee Benefits – Principles of INDAS 19 shall be followed.
· Share based payments (ESOPs or Cash Liability) – Principles of INDAS 102 shall be
applicable.
· Assets held for sale - The acquirer shall measure an acquired non-current asset (or
disposal group) that is classified as held for sale at the acquisition date in accordance
with Ind AS 105
C) MEASUREMENT PERIOD –
Ind AS 103 provides a measurement period window wherein if all the required information is
not available on the acquisition date then the entity will be required to do the purchase price
allocation on a provision basis.
Meaning – the period after the acquisition date during which the acquirer may adjust the
provisional amounts recognized for a business combination.
The measurement period ends as soon as the acquirer receives the information it was
seeking about facts and circumstances that existed as of the acquisition date or learns that
more information is not obtainable. However, the measurement period shall not exceed one
year from the acquisition date.
What if when New Information arise after acquisition during measurement period –
During the measurement period
(a) The acquirer shall retrospectively adjust the provisional amounts recognized at the
acquisition date to reflect new information obtained about facts and circumstances that
existed as of the acquisition date and, if known, would have affected the measurement of
the amounts recognized as of that date.
(b) The acquirer shall also recognize additional assets or liabilities if new information is
obtained about facts and circumstances that existed as of the acquisition date.
Accounting –Adjust related Assets/Liabilities and NCI.

Any change i.e. increase and decrease in the net assets acquired due to new information available
during the measurement period which existed on the acquisition date will be adjusted against
24.43
INDAS 103
goodwill.
However, after the measurement period ends, any change in the value of assets and liabilities due
to an information which existed on the valuation date will be accounted as an error as per Ind AS
8, Accounting policies, Changes in Accounting Estimates and Errors.
24.44
INDAS 103
12. CONTROL OBTAINED OVER A SUBSIDIARY WITHOUT
THE TRANSFER OF CONSIDERATION
An acquirer sometimes obtains control of an acquiree without transferring consideration. Such

circumstances include:
a) The acquiree repurchases a sufficient number of its own shares for an existing investor (the
acquirer) to obtain control.
b) Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in
which the acquirer held the majority voting rights.
c) The acquirer and acquiree agree to combine their businesses by contract alone. The acquirer
transfers no consideration in exchange for control of an acquiree and holds no equity interests in
the acquiree, either on the acquisition date or previously. Examples of business combinations
achieved by contract alone include bringing two businesses together in a stapling arrangement or
forming a dual listed corporation.
Treatment:
In a business combination achieved without the transfer of consideration, “acquisition-date fair
value of the consideration transferred” in the formula for measurement of goodwill or gain on
bargain purchase is substituted by “acquisition-date fair value of its interest in the acquiree”. In
other words, the acquirer shall re-measure its existing equity interest in the acquiree at its
acquisition date fair value (and recognize the gain or loss on such re-measurement in profit or loss
or other comprehensive income, as the case may be) and use that to compute goodwill or gain on
bargain purchase.
In a business combination achieved by contract alone, the acquirer shall attribute to the owners of
the acquiree (i.e. those holding equity interests) the amount of the acquiree's net assets
recognized in accordance with Ind AS 103. In other words, the equity interests in the acquiree
held by parties other than the acquirer are a non-controlling interest in the ACQUIRER'S post-
combination financial statements even if the result is that all of the equity interests in the
acquiree are attributed to the non-controlling interest.
Example 19
A Ltd. obtained control over B Ltd. by contract alone. There is no stake in B Ltd. held by A Ltd.
So, while preparing the consolidated financial statements, A Ltd. will attribute 100% of the net
assets of B Ltd. to the non-controlling interest.
24.45
INDAS 103
13. IMPAIRMENT OF GOODWILL
· Once the Goodwill is recognized on Business Combination under Consolidated Financial
Statements, it is required to make impairment testing on annual basis on such goodwill as per
IndAS 36 'Impairment of Assets’
One most common point to understand is Goodwill can never be shown (recognised) in SFS.
· Goodwill is not required to be amortized every period.

· According to IndAS 36, Goodwill is tested for impairment by allocating it to the related CGUs of
Parent as well as Subsidiary.
· Out of total impairment loss, Goodwill value is to be adjusted first.
· What are the items which would be affected due to impairment of goodwill?
o Goodwill A/c recognized in CFS - Reduction
o Consolidated Retained Earnings of Grp - Reduction
o It may affect NCI also in case the NCI was measured as per Fair Value method (Full
goodwill method)
· Goodwill is credited and debit effect would be given to –

o Retained Earnings of Parent (Only Parent's Share) (If NCI is measured at Proportionate
Share of Net Assets)
o Retained Earnings of Parent (Parent's Share) & NCI (NCI's Share) (if NCI is measured
at Fair Value)
Journal Entry in CFS
Full Goodwill Method Partial Goodwill Method

Consolidated Retained Earnings A/c Dr Consolidated Retained Earnings A/c Dr
NCI A/c Dr To Goodwill A/c
To Goodwill A/c
24.46
INDAS 103
Example 20
P Ltd. acquired 80% of the share capital of S Ltd. two years ago, when the reserves of S Ltd.
stood at Rs. 1,25,000. P Ltd. paid initial cash consideration of Rs 1 million. Additionally, P Ltd.
issued 200,000 shares with a nominal value of Rs 1 and a current market value of Rs 1.80. It was
also agreed that P Ltd. would pay a further Rs 500,000 in three years' time. Current interest
rates are 10% pa. The appreciate discount factor for Rs1 receivable three years from now is
0.751. The shares and deferred consideration have not yet been recorded.
Below are the balance Sheet of P Ltd and S Ltd as at 31 December 20X4:
P Ltd. (Rs. In 000) S Ltd. (Rs. In 000)
Non-Current Assets
Property, Plant and Equipment 5,500 1,500
Investment in S Ltd at Cost 1,000
Current Assets
Inventory 550 100
Receivables 400 200
Cash 200 50
7,650 1,850
Equity
Share Capital 2,000 500
Retained Capital 1,400 300
3,400 800
Non-Current liabilities 3,000 400
Current Liabilities 1,250 650
7,650 1,850
Further Information:
(i) At acquisition the fair values of S Ltd. plant exceeded its book value by Rs 200,000.
The plant had a remaining useful life of five years at this date.
(ii) For many years S Ltd. has been selling some of its produce under the brand name of M
ltd. at the date of acquisition the directors of P Ltd. valued this brand at Rs 2,50,000
with a remaining life of 10 years. The brand is not included in S Ltd Balanced Sheet.
(iii) The consolidation goodwill has been impaired by Rs 2,58,000.
(iv) The P Ltd Group values the non-controlling interest using the fair value method. At the
date of acquisition, the fair value of the 20% non-controlling interest was Rs 3,80,000
Prepare the consolidate Balance Sheet as at 31 December 20X4.
24.47
INDAS 103
Answer:
P Ltd consolidate Balance Sheet at 31 December 20X4
Goodwill 783
Brand name 200
Property, plant & equipment (5,500+1,500+200-80) 7,120
Current Assets:
Inventory (550+100) 650
Receivable (400+200) 600
Cash (200+50) 250
9,603
Share Capital (2,000+200) 2,200
Share Premium (0+160) 160
Retained earnings 1,151
3,511
Non –controlling interest 337
3,848
Non-current Liabilities (3,000+400) 3,400
Current Liabilities (1,250+650) 1,900
Deferred consideration (376+79) 455
9,603
24.48
INDAS 103
14. CHANGE IN PERCENTAGE OF HOLDING OF PARENT CO.
A. Full/Partial Disposal of Share (with loss of control) with or without Significant

Influence:
In case parent sells entire investments with loss of control or sells majority of investment and
retain such portion which does not result in Control then consider following journal entry:
Bank A/c Dr. (Sale Proceeds)
Investments A/c Dr. (Value of retained investments if any at Fair Value)
Minority Interest Dr. (Proportionate share in NA)
Capital Reserve Dr. (Previously recognized if any on COC)
To Net Assets A/c (Value on the date of sale)
To Goodwill A/c (Previously recognized if any on COC)
(Any difference in above entry will be transfer to Profit and Loss A/c of Holding co.)
B. Purchase of additional shares or Disposal of shares affects NCI but Control

exist:
Where proportion of the equity of NCI changes, then group shall adjust controlling and non-
controlling interest and any difference between adjustment of NCI (increase or decrease) and fair
value of consideration received is to be attributed to the Other Equity of Parent.
Journal Entries:
1. If additional shares purchased (control already exist)
NCI A/c (Pro rata adjustment)
To Cash A/c (Purchase Consideration)
(difference in above entry is directly transfer to other equity)
2. If some holding is disposed (control not lost)

Cash A/c Dr. (Sales proceeds)
To NCI A/c (Proportion of NA + Goodwill)
(difference in above entry is directly transfer to other equity)
C. Loss of control of a subsidiary in two or more transactions

A parent might lose control of a subsidiary in two or more arrangements (transactions). However,
sometimes circumstances indicate that the multiple arrangements should be accounted for as a
single transaction.
The above requirement is relevant because Ind AS 110 requires an entity to record gain / loss on
disposal of investment in subsidiary in profit or loss only when the control is lost. This can give
opportunity to an entity to arrange the disposal in such a way that it can reduce the amount to be
recognized in profit or loss.
24.49
INDAS 103
Example 21:
MN Ltd. was holding 80% stake in UV Ltd. Now, MN Ltd. wants to dispose its entire holding in
UV Ltd. It can do it in following ways:
Ÿ Option 1: Sale entire 80% stake in single transaction. In this case, the entire gain / loss on
sale of 80% stake would be recognized in profit or loss.
Ÿ Option 2: Sale 25% stake in one transaction and sale the remaining 55% stake in another
transaction. In this case, the gain / loss on sale of 25% stake would be recognized directly in
equity since it will be sale of stake without loss of control. When the remaining 55% stake is
sold then the gain / loss pertaining to that stake will be recognized in profit or loss.
In determining whether to account for the arrangements as a single transaction, a parent shall
consider all the terms and conditions of the arrangements and their economic effects. One or
more of the following indicate that the parent should account for the multiple arrangements
as a single transaction:
24.50
INDAS 103
Example 22: -
Parent Limited. 31/3/24
SFS CFS
Other Assets 30,00,000 50,00,000
Investment in Subsidiary B 100% 8,00,000 -
C 100% 6,00,000
Goodwill B - 50,000
C - 40,000
44,00,000 50,90,000
Equity Share Capital 25,00,000 25,00,000
Other Equity 10,00,000 16,00,000
Liabilities 9,00,000 9,90,000
. 44,00,000 50,90,000
Net Assets of C included in above Balance Sheet: -

Other Assets = 9,00,000
Liabilities = 2,50,000
No 1st April, 2024, Parent sold full Investment of 100% in C @ Rs. 7,00,000
On other transaction on 1st April prepare Separate Balance Sheet & CBS if Parent after above
Transactions.
Solution:
SFS of Parent
Bank A/c Dr. 7,00,000
To Gain A/c 1,00,000
Separate Balance Sheet

Other Assets 37,00,000
Investment in B 8,00,000
45,00,000
45,00,000
CFS of Parent
Bank A/c Dr. 7,00,000
Liabilities A/c Dr. 2,50,000
To Gain (P&L) A/c 10,000
To Assets A/c 9,00,000
To Goodwill A/c 40,000
24.51
INDAS 103
Other Assets (50-9+7) 48,00,000

Goodwill 50,000
48,50,000
Other Equity (16,00,000 + 10,000) 16,10,000
Liabilities (9,90,000 – 2,50,000) 7,40,000
48,50,000
24.52
INDAS 103
15. CHAIN HOLDING
Let us understand this topic through given diagram:

H Ltd.
(Parent)
80% S Ltd.
(Direct Sub.) SS Ltd.
(Sub Subsidiary)
IMPORTANT CONCEPTS:
1. Calculate Parent's Share (H Ltd.) in Direct Subsidiary (S Ltd.) and Calculate NCI's Share
(outside share holders of S Ltd.) in Direct Subsidiary (S Ltd.)
H's Share in S Ltd. = 80%

NCI's Share in S Ltd. = 20%
2. Calculate Parent's Share (H Ltd.) in Indirect Subsidiary (SS Ltd.) and Calculate NCI's Share
(outside share holders of SS Ltd.) in SS Ltd.
H's Share in SS Ltd. = 80% of 70% = 56%

NCI's Share in SS Ltd. = 100% - 56% = 44%
3. Prepare “Statement of Changes in Net Assets” of both the Subsidiaries (Direct S Ltd. and
Indirect SS Ltd.) and bifurcate the Post Acquisition Column into Two Parts “Parent's Share” and
“NCI's Share” which we usually do in every case.
4. While calculating Goodwill or GBP under Cost of Control working, the value of Investments
(Purchase Consideration) shall be taken as under-
Full Value of Investment made by Parent in Direct Subsidiary S Ltd.

Investment Made by S Ltd. in SS Ltd. x Parent's Share
5. The portion of Investments belongs to NCI of S Ltd. i.e. Investment Made by S Ltd. in SS Ltd. x
NCI's Share of S Ltd. shall be deducted from the Final working of NCI (Since NCI is having
credit balance and Investment is having debit balance therefore it is deducted)
24.53
INDAS 103
Example 23: - Chain Holding
A Ltd. acquired 90% Equity Investment in B Ltd. B Ltd. acquired 70% Investment in c Ltd.
Balance Sheet as on 31/3/24
A B C
Investment: B – 90% 5,00,000 - -
C – 70% - 3,50,000 -
Other Assets 10,00,000 6,50,000 8,00,000
15,00,000 10,00,000 8,00,000
Equity Share Capital 7,00,000 5,00,000 4,00,000
Reserves & Surplus 4,00,000 2,50,000 1,50,000
Liabilities 4,00,000 2,50,000 2,50,000
15,00,000 10,00,000 8,00,000
1) Dividend paid by C on 1/8/23 @15%

2) Dividend paid by B on 1/8/23 @ 12%
3) C Ltd. Sold goods to A Ltd. Costing Rs. 40,000 @ Rs. 50,000 (All are unsold with A on
Balance Sheet)
4) Other Assets are PPE & FV of PPE is 7,50,000 (B Ltd.) & 10,00,000 (C Ltd.)
Depreciation Rate is 10% P.A.
5) Tax Rate is 25%
6) Reserves & Surplus of B Ltd & C Ltd as on 1/4/23 are 90,000 & 60,000 respectively
Prepare Consolidated Balance Sheet of A Ltd.
Solution:
Working Note 1: Holding Ratio
A in B = 90%
NCI in B = 10%
A in C = 90% x 70% = 63%
NCI in C = 37%
24.54
INDAS 103
Working Note 2: PPE Adjustment
B C
BV as on 31/3 6,50,000 8,00,000
BV as on 1/4 @10% 7,22,222 8,88,889
BV as on 1/7 7,04,167 8,66,666
7FV as on 1/7 7,50,000 10,00,000
FV Gain 45,833 1,33,333
Depreciation that has been
charged from 1/7 to 31/3 54,167 66,667
Depreciation that should be
charged on FV 56,250 75,000
Excess Depreciation 2,083 8,333
Working Note 3: SCNA of C

Reserves & Surplus 60,000 90,000 1,50,000
+ Dividend Paid - 60,000
4,60,000 1,50,000
(+/-) Time Adjustment 37,500 (37,500)
for 3 Months
16,04,000 2,04,000
(-) Unrealized Profit - (10,000)
(+/-) PPE Adjustment 1,33,333 (8,333)
(+/-) DTL on PPE (33,333) 2,083
+ DTA on Stock - 2,500
Adjustment
5,97,500 98,750
100% Net assets A - 63% = 62,213
as on DOA NCI - 37% = 36,537
SCNA of B
Reserves & Surplus 90,000 1,60,000 2,50,000
+ Dividend Paid by B - 60,000
(-) Dividend Received - (42.000)
by B
5,90,000 1,78,000
24.55
INDAS 103
(+/-) Time Adjustment 44,500 (44,500)
for 3 Months
6,34,500 1,33,500
(-) Unrealized Profit - (10,000)
(+/-) PPE Adjustment 45,833 (2,083)
(+/-) DTL on PPE (11,458) 521
+ DTA on Stock - -
Adjustment
6,68,875 1,31,938
100% Net assets A - 90% = 1,18,144
as on DOA NCI - 10% = 13,194
Working Note 4: Cost of Control

Investment B Ltd. C Ltd.
+ NCI as on DOA 5,00,000 3,15,000
(-) 100% Net Assets 66,888 2,21,075
Gain on Bargain Purchase (6,68,875) (5,97,500)
1,01,987 61,425
Working Note 5: Non-Controlling Interest

B Ltd. C Ltd.
NCI as on DOA
66,888 2,21,075
+ Share in Post-Acquisition Profits
13,194 36,537
(-) Dividend
(6,000) (18,000)
(-) Share in Investment of B's NCI
(35,000) -
39,082 2,39,612
Working Note 6: Consolidated Other Equity
R&S CR
Other Equity Balance with A 4,00,000 -
Share in Post-Acquisition Profits B 1,18,744 -
C 62,213
(-) Dividend received from B (54,000)
+ Gain on Bargain Purchase B - 1,01,987
C - 61,425
5,26,957 1,63,412
24.56
INDAS 103
Consolidated Balance Sheet of Group
B Ltd.
1) Other Assets A (10,00,000 – 10,000) 26,08,750
= 9,90,000
B = 6,50,000
FV = 45,833
Dep = (2,083)
6,93,750
C = 8,00,000
FV = 1,33,333
Dep = (8,333)
6,93,750
2) DTA (On Unrealized Profit) 2,500

Total 26,11,250
1) Equity Share Capital 7,00,000
2) Other Equity 6,90,369
3) NCI B = 39,082 2,78,694
C = 2,39,612
4) Liabilities B = 10,937 2,187
DTL C = 31,2504
5) Other Liabilities 9,00,000
Total 26,11,250
24.57
INDAS 103
16. ACQUIRER'S SHARE BASED PAYMENT AWARDS
EXCHANGED FOR AWARDS HELD BY THE Acquiree's
EMPLOYEES
Introduction:
If the acquirer replaces the acquiree awards, either all or a portion of the market-based measure
of the ACQUIRER'S replacement awards shall be included in measuring the consideration
transferred in the business combination.
Market based measure means that awards will be re-measured on the acquisition date as per the
requirements of Ind AS 102.
Treatment:
In situations in which acquiree awards would expire as a consequence of a business combination and
if the acquirer replaces those awards when it is not obliged to do so, all of the market-based
measure of the replacement awards shall be recognized as remuneration cost in the post-
combination financial statements in accordance with Ind AS 102. That is to say, none of the
market-based measure of those awards shall be included in measuring the consideration
transferred in the business combination. The acquirer is obliged to replace the acquiree awards if
the acquiree or its employees have the ability to enforce replacement
24.58
INDAS 103
17. PRE-EXISTING RELATIONSHIOP BETWEEN ACQUIRER
AND ACQUIREE
There can be two types of relationships:
1) Non-contractual Relationship:
i) Example - Law Suit filed by acquirer on acquiree or vice versa
ii) If acquirer and acquiree agreed to settle these law suits due to business
combination by paying/receiving compensation, then it needs to be considered under
Business Combination Accounting in the books of acquirer on date of acquisition.
iii) Above compensation shall not become part of Purchase Consideration. It is to be
recognized separately as under:
Compensation Receivable A/c Dr. Loss (P&L) A/c Dr.

To Gain (P&L) A/c To Compensation Payable A/c
(iv) If any receivable/payable is shown in Books of Acquiree then it shall not become part
of Net Assets.
2) Contractual Relationships:
i) Example – Required Rights (i.e. Franchise rights given by Acquirer to Acquiree prior
to date of acquisition)
ii) On date of Acquisition, acquirer shall recognise:
a) “Required Rights” as a Separate Identifiable Intangible Asset apart from
other Net Assets Acquired at Fair Value.
b) “Loss on Cancellation of Rights” at Lower of:-
Ÿ Penalty Payable as per Contractual Terms; or
Ÿ Difference between Fair Value of Required Right & Proportionate Value of
Contract.
iii) Journal Entry of above Loss on Cancellation:
Loss on Cancellation (P&L) A/c Dr.
To Penalty Payable A/c
Example 24:
Aakash Ltd. is Sued by Subhash Ltd. for a legal claim of Rs. 10 Lacs for a use of Trademark of
Subhash Ltd. Aakash Ltd. has made provision for penalty payable of Rs. 6 Lacs. However Subhash
Ltd. has not recognized any receivable for penalty.
After 1 year (Case is not yet settled), Subhash Ltd. acquired control over Aakash for a
Consideration of Rs. 62 Lacs (net of above penalty claim).
Fair Value of Claim on Date of Acquisition is Rs. 10 Lacs
Fair Value of Net Assets Acquired of Aakash Ltd. is Rs. 70 Lacs.
Assume NCI is Nil. Calculate Goodwill or Gain from Bargain Purchase.
Golden Rule :- PC should be kept separate from Pre-existing Relatiaships. PC Should not
included the effect of pre-existing Relationship. PER should be recog. Separately # Fv on
DOA.
Gross PC for acquining Contral = 62 + 10 = 72
24.59
INDAS 103
Jounral Enteres in the Books of subhash Ltd.
1) Compensation Refundable Dr. 10
To Gain (P&l) 10
2) Net Asset Dr. 70
Goodwill Dr. 2
To Consideration Payable A/c 72
3) Consideration payable 72
To Compensation Receivable 10
To Bank / Cash 62
Example 25:
Consider above Example 1 with following changes:
i) Now Subhash Ltd. is sued by Aakash Ltd.
ii) Gross Final Consideration Payable by Subhash Ltd. towards acquisition of business is Rs.
85 Lacs
iii) Both Companies have not passed any entry of Payable or receivable of penalty in their
books.
Solution
Actual Consideration to world acquiring Control = 85 - 10 = 75 Lacs.
1) Loss (P&l) Dr. 10

To Compensation Payable 10
2) Net Assets Dr. 70
Goodwill Dr. (b/f) 5
To Consideration Payable 75
3) Consideration Payable Dr. 75 85
Compensation Payable Dr. 10
To Bank A/c
Example 26:
Vsmart Academy Pune provided franchise rights for 10 years to Kolkata based Coaching Center
for Rs. 10 Lacs. Penalty clause as per the contract due to cancellation of Franchise is 110% of
remaining period of proportionate franchise fees.
After two years, Vsmart acquired Kolkata center at a consideration of Rs. 60 Lacs (Including
Penalty). Fair Value of Net Assets of Kolkata is Rs. 40 Lacs (other than Franchise Rights).
Fair Value of Franchise Rights as on DOA is Rs. 15 Lacs.
Solution:
1) Propertional Values of Contract = 10/10 x 8 = 8 Lacs.
2) Penalty as per Contract = 8 Lacs + 10% = 8.8 Lacs.
3) Fair Value of Reacquuired Lights = 15 Lacs.
4) Differences Between FV & prop. Value of Contract = 7 Lacs. (3-1)
24.60
INDAS 103
5) Lower will 7 Lacs. Payable which is recognised as penalty
6) PC for control acquisition = 60 - 7 = 53 Lacs.
DOA (Journal entry)

1) Loss as Cancellation (P&l) 7
To Penalty Payable 7
2) Net Assets a/c Dr. 53
ReAcq. Rights a/c Dr. 2
To Consideration Payable 40
To GBP (OCI - CR) 15
3) Penalty Payable Dr. 7

Consideration Payable Dr. 53
To Bank a/c 60
24.61
INDAS 103
18. DEMERGER
Demerger is an arrangement whereby some part/undertaking of one company is transferred to

another company which operates completely separate from the original company. Shareholders of
the original company are usually given an equivalent stake of ownership in the new company
Demerger is undertaken basically for following reasons:
· To give effect to of family partitions in case of family owned enterprises.
· A demerger is also done to help each of the segments operate more smoothly, as they can
focus on a more specific task.
Demerged company shall transfer its business (Net Assets) to resultant company. In the books
of demerged company, all Assets and Liabilities of the segment demerged shall be de-recognized
and loss on demerger or loss on reconstruction is recognized in the equity.
Resultant Company shall follow IndAS 103 – acquisition method i.e. it shall record the Net
Assets at Fair Value. Any difference between purchased consideration and fair value of net assets
shall be recognized as Goodwill or Gain from bargain purchase (Capital Reserve).
24.62
INDAS 103
19. COMMON CONTROL BUSINESS COMBINATIONS
(Appendix C of IndAS 103)
1.What is Common Control Business Combination (CCBC)?

Common control business combinations means a business combinations involving entities or
businesses in which all combining entities or businesses are ultimately controlled by the same
party or parties both before and after the business combination and that control is not
transitory (i.e control should not be temporary)
“CONTROL DOES NOT TRANSFER”; IT EXIST WITH SAME ENTITY
Common control business combinations will include transactions, such as transfer of subsidiaries or
businesses, between entities within a group.
2.Which accounting method is prescribed for CCBC?

Pooling of interests method is applied under Common Control business combination by both
transferor and transferee companies as under:
· Assets and Liabilities are derecognized by transferor and recognized by transferee at
Book Values.
· All the Reserves and Surplus of transferor is maintained by Transferee Company.
· Consideration (PC) is calculated at Fair value and recorded accordingly.
Any difference in above shall be transfer to Capital Reserve in transferor and transferee
company.
3.Example on Common Control Transaction:

Company X, the ultimate parent of a large number of subsidiaries, recognizes the retail segment of
its business to consolidate all of its retail businesses in a single entity. Under the recognition,
Company Z (a subsidiary and the biggest retail company in the group) acquires Company X's
shareholding in its one operating subsidiary; Company Y by issuing its own shares to Company X.
after the transaction, Company X will indirectly control the operating and financial policies of
Companies Y.
Before-re-organization
Company X
Company Y Company Z Company M Other Subsidiaries
24.63
INDAS 103
After re-organization
Company X
Other subs Company Z
Company Y
In this situation, Company Z pays consideration to company X to obtain control of Company Y. The
transaction meets the definition of a business combination. Prior to the re-organization, each of
the parties are controlled by Company X. after the re-organization, although Company Y are now
owned by Company Z, all two companies are still ultimately owned and controlled by Company X.
From the perspective of Company X, there has been no change as a result of the re-organization.
This transaction therefore meets the definition of a common control combination and is in the
scope of Ind AS 103.
Different Cases of Common Control Business Combination:
When Two Companies merge When Subsidiary of a Group An Existing Company

& Form A New Company Acquires Control of Another Transfers One Division to A
Existing Subsidiary of Same Newly Incorporated Company
Group
When Two Companies merge Example – A Ltd. Holds 90% An Existing Company Transfers
& Form a New Company in Share Capital of B Ltd. & 80% One Division to a Newly
Which Shareholders of Both Share Capital of C Ltd. Incorporated Company such
Companies Shall have same Now A Ltd. Sold its investment New Company Issues Shares to
Rights. in C Ltd. to B Ltd. the Share Holders of Existing
Company, as a result of which
Example – (This means Subsidiary of a such Share Holders get
A Ltd. + B Ltd. = C Ltd. Group Acquires Control of
Control over the New Company.
Under this case, Purchase another Existing Subsidiary
i.e. Control over the
Consideration will be Equal to of Same Group)
Transferred Division is not
Sum of Share Capital of Both
Shifted. It Exist with Same
the Companies if Separate
Purchase Consideration is not Members of Group. (These
given. Shareholders were already
having control over Net Assets
of Existing Company. However
it may be noted that this may
also result into Demerger)
24.64
INDAS 103
(A) How to Calculate Purchase Consideration in Common Control Business Combination
transaction if Purchase Consideration is Not Given in Question?
Answer:
Under Common Control Business Transaction, Rights/Control does not Transfer, it should remain
with same Party.
Therefore, If Two Companies are getting Merged under Common Control Business Transaction
Then we should make sure that Rights of Shareholders of Both the Companies remain Unaltered
in the Future Profits of the New Company.
Therefore, Purchase Consideration is Equal to the Sum of Equity Share Capital of Both the
Companies. (In Above Example PC = ESC A Ltd. + ESC B Ltd.)
(B) How to Allocate Above Purchase Consideration to the Share Holders of Both Companies?
Answer:
Total Purchase Consideration should be allocated in Proportion of “Book Value of Net Assets
Taken Over” of Both the Companies.
24.65
INDAS 103
Common Control Business Combination (CCBC)
(Appendix C of Ind AS 103)
Example 27: -
A Ltd. holding 100% in B Ltd. and 100% in C Ltd.
A Ltd. sold its 100% Investment in C Ltd. to B Ltd.
Is there ant change in the Group?
Solution:
NO
Earlier B & C were under the Common Control of A.
Even after the above transaction still B & C are under the Common Control of A.
Acquisition Method
B Ltd Consolidated Financial Statement (B + C)
Asset B xxxx
C (FV)
Goodwill xxxx
xxxx
Liabilities B xxxx
C (FV)
NCI xxxx
GBP xxxx
From A's Point of View (Group Point of View) (CCBC Accounting)
Consolidated Financial Statement
Asset A xxxx
B
C (Book Value) xxxx
Goodwill xxxx
CCBC means an arrangement where ultimate Control exist with same Party / Parties / Entity.
(Controlling Entity / Party is same)
24.66
INDAS 103
Example 28:
A Ltd. having 3 Promoters Gargee, Nisha & Mansi
B Ltd. having 3 Promoters Rahul, Abhi & Rajat.
A & B Ltd are merged & formed C Ltd. Where all 6 will have Equal Control over C Ltd
Solution:
This is also CCBC Since C Ltd. is under the Common Control of A Ltd. & B Ltd.
C ltd. (New Company) Shall follow CCBC Accounting & not Acquisition method as this is a
case of Merger.
C Ltd.
Asset A (BV) xxxx

B (BV)
Liabilities A (BV) xxxx
B (BV)
Reserves & Surplus A xxxx
B
Example 29: -
A Ltd. is formed by Mr. Chawla & Mrs. Chawla 50% Each.
B Ltd. is also formed & Controlled by Mr. & Mrs. Chawla.
Solution:
A Ltd. & B Ltd. are under the Common Control of Mr. & Mrs. Chawla.
Example 30: -
A Ltd. having Shareholders Rajat, Mansi & Nisha holding 33%, 33% & 34% Respectively.
B Ltd. having Shareholders Rajat, Mansi & Nisha holding 33%, 33% & 34% Respectively.
(Individuals are not related to Each other)
Mansi & Nisha entered into an arrangement to Jointly Control A & B Together.
Solution:
A Ltd. & B Ltd. are under the Common Control of Mansi and Nisha Jointly
24.67
INDAS 103
20. REVERSE ACQUISITION
A. Under IndAS 103 Business Combination: 'ACQUISITION METHODRs. is applicable. This
method has 4 steps:
1. Identifying the Acquirer,
2. Determining the Acquisition date,
3. Recognizing and Measuring the identifiable assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree;
4. Recognizing and Measuring Goodwill or a Gain from a Bargain Purchase.
B. As per Step 1 – Acquirer needs to be identified. Most of the time, it's straightforward – the
acquirer is usually the investor who acquires an investment or a subsidiary or a business.
Acquirer means an Entity who obtains Control of businesses.
C. But sometimes acquirer may be different from legal acquirer (Reverse Acquisition). In such
case, accounting acquirer is identified.
Example 31: X Ltd. acquired the business of Y Ltd. It will issue 5 shares of Rs. 10 each for every 2
shares held.
No. of O/s shares in X – 8000 shares
No. of O/s shares in Y – 7000 shares
Net Assets of Y – 90000/-
Identify the acquirer.
D. Preparation & Presentation of Consolidated Financial Statements:

CFS shall be issued under the name of Legal Acquirer but described in the notes as a continuation
of the FS of the Accounting Acquirer (Legal Subsidiary) with ONE ADJUSTEMENT, which is to
adjust retroactively the accounting ACQUIRER'S legal capital to reflect the legal capital of the
legal acquirer.
Total Share Capital = SC of Accounting Acquirer+ PC to Legal Acquirer
Reconciliation of legal SC of the entity whose FS are being prepared (Legal Acquirer) with
Presented Share Capital (as above) to be disclosed
Reserves of Accounting Acquirer to be only recognized, at its carrying amount
Goodwill or GBP = FV of Consideration – FV of Net Assets of Legal Acquirer
Fair Value of Consideration –

The Assets, Liabilities, Retained Earnings and other Equity balances of accounting acquirer -
shall be recognized and measured at carrying amount.
The Assets & Liabilities of Legal Acquirer - shall be recognized and measured as per IndAS 103
24.68
INDAS 103
i.e. Fair Value.
NCI (some of the owners of accounting acquirer might not exchange their equity interests for
equity interest of the legal acquirer) – they shall be measured at proportionate share of Net
Assets of Accounting Acquirer (i.e. % of Carrying amount of Net Assets)
E. How to Calculate the EPS after Business Combination-

Earnings Available to ESH / W. Avg. No. of Equity Shares
(a) Earnings Available to ESH:
EAESH of Accounting Acquirer for a period before Business Combination
(+)
EAESH of Combined Entity after Business Combination
(b) W. Avg. No. of Equity Shares:
Legal no. shares in the combined entity to Accounting Acquirer for full year
(+)
Legal no. Shares with legal Acquirer for Post Combination Period only
Most Important Question is How to Calculate the Consideration under Reverse

Acquisition that Should be Discharged by Accounting Acquirer against getting
Control?
CASE 1 - CASE 2 -
Takeover by One Company of a Company Merger of Two or More Companies
a) An Exchange ratio Must be given Exchange Ratio if Not Given then fair value of
b) Fair Value of Accounting Acquirer shall both the companies may be given.
also be given. Purchase Consideration is equal to FV of
c) Based on Above Exchange Ratio, Business of Legal Acquirer.
Calculate the number of shares which
are to be issued by legal acquirer to How to identify that it is Reverse Acquisition?
Accounting Acquirer. Based on above fair value ratios if percentage of
d) Now calculate Percentage of Holding of fair value is more than 50% then it is reverse
acquisition.
Total Outstanding shares of Legal
Acquirer (% of Holding means % of
Shares Held by Accounting Acquirer in
Legal Acquirer) (If this Percentage is
more than 50% than we can say that
this is the case of reverse acquisition)
e) Taking above % as a base & Taking
Shares outstanding of Accounting
Acquirer as a base calculate purchase
consideration as under:
{[O/s Shares issued by A/c Acq. / % of Holding
(Point d) X 100] – O/s shares issued by A/c Acq.
} X Fair Value per share of A/c Acquirer
24.69
INDAS 103
Example 32
The Balance Sheets of Entity A and Entity B immediately before business acquisition are as
follows: Amount (₹in thousands)
Particulars Entity A Entity B

Current Assets 600 800
Non-Current Assets 1,200 2,900
Total Assets 1,800 3,700
Current Liabilities 400 200
Non - Current Liabilities 300 1,200
Total Liabilities 700 1,400
Equity
30,000 Shares of ₹ 10 Each 300
60,000 Shares of ₹ 10 Each 600
Retained Earnings 800 1,700
Total Equity 1,100 1,200
Total Equity and Liability 1,800 3,700
On 31 March 20X1, Entity A issues 2.5 shares in exchange for each share of Entity B. All of entity
B's shareholders exchange their shares. Therefore, Entity A issues 1,50,000 shares in exchange
for all 60,000 shares of entity B. Entity A legally owns 100% of entity B.
The shareholders of Entity B own 83.33% (1,50,000/1,80,000) of the combined entity. The
directors of entity B are appointed 6 out of 8 positions in combined entity board. In accordance
with Ind AS 103, Entity B (Legal Acquiree) is the accounting acquirer and Entity A (Legal Acquirer)
is the accounting acquiree as Entity B shareholders control over combined entity.
The quoted market price of Entity B's share as at 31st March, .20X1 is ₹ 105 per share and Entity
A's share price as at 31st March, 20X1 is ₹ 20 per share.
Assume the fair value of Entity A's identifiable net assets as at 31st March, 20X1 are the same as
carrying values and ignore tax effect.
The acquisition date fair value (i.e. at 31st March, 20X1) of the accounting acquirer equity
instrument is generally used to determine the amount of consideration transferred for business
combination. In this case it is 105 per share (Entity B).
So if the business combination had taken place in the form of Entity B issuing additional shares to
Entity A's shareholders in exchange for their shares in Entity A, Entity B would have to issue
12,000 shares (30,000 / 2.5) for the ratio of ownership interest in the combined entity to be same.
(12,000/72,000). Therefore, the consideration for the business combination effectively
transferred by Entity B is ₹ 12, 60,000 (12000 Shares x 105).
Calculation of Goodwill:
Fair value of Assets less Liabilities Assumed (Entity A) - ₹11,00,000
Consideration transferred (by Entity B) - (₹12,60,000)
Goodwill - ₹1,60,00
24.70
INDAS 103
Example 33: - (Identifying Accounting Acquirer)
Idea Ltd. acquired the Net Assets of Vodafone & issued shares as a consideration.
Idea issues 5 shares for every 2 Held by Share Holders of Vodafone
Outstanding Shares of Vodafone is 1,00,000 No.
Outstanding Shares of Idea is 50,000 No.
Who is Accounting Acquirer & Legal Acquirer?
Solution:
Idea shall issue to Vodafone Share Holders = 1,00,000/2 x 5 = 2,50,000 No.
Now, after above issue, Total Outstanding Equity Shares of Idea will be 50,000 + 2,50,000 No.
i.e., 3,00,000 No.
Who are the Share Holders of Idea?
50,000 No. Held by Old Share Holders of Idea = 16.67%
2,50,000 No. Held by New Share Holders of Idea who were earlier Shareholders in Vodafone =
83.33%
Since Share Holders of Vodafone are having 83.33% Voting Rights It can be said that Vodafone is
Accounting Acquirer.
Idea is Accounting Acquiree although Idea is a Legal Acquirer
Balance Sheet of Idea Ltd. & Group
Asset
Vodafone (CA) xxxx
Idea (Fair Value)
Liabilities
Vodafone (CA) xxxx
Idea (Fair Value)
Example 34: -
How to Calculate the PC that should be discharges by Vodafone against Control
FV of one Share: -
Idea = 40/-
Vodafone = 75/-
Since Vodafone gets 83.33% in Idea.
Vodafone Existing Outstanding Shares = 1,00,000
1,00,000 / 83.33% x 16.67% = 20,000 No.
Vodafone should have issued 20,000 No. to Obtain Control & Voting Rights over Idea
PC = 20,000 x 75/- = 15,00,000/-
Example 35: -
Calculate Goodwill / Gain on Bargain Purchase if FV of Net Assets of Idea is 14,20,000
Solution:
PC to Acquiree = 15,00,000
+ NCI =0
(-) 100% Net Assets = (14,20,000)
Goodwill (Only for A/c Purpose) = 80,000
24.71
INDAS 103
Student Notes:-
24.72
INDAS 103
TOPIC 26
INDAS 110 -
CONSOLIDATED FINANCIAL STATEMENTS
Index
1. Objective 26.2
2. Control as a basis for Consolidation 26.2
3. How to Assess Control? 26.3
4. Power 26.4
5. Accounting Requirements of IndAS 110 26.12
6. Exceptions in INDAS 110 26.13
7. Relationship with Other Parties 26.14
8. Investments Entities 26.16
9. Changes in Classification 26.22
10. Reporting Period of Parent & Subsidiary 26.24
11. Allocating Share in Profit/Loss to NCI 26.25
12. Control of Specified Assets 26.26
Quote:
“Sit with winners, the conversation will be different”
INDAS 110
(1) WHAT IS THE OBJECTIVE OF INDAS 110?
The objective of INDAS 110 Consolidated Financial Statements is to establish principles for the
presentation and preparation of consolidated financial statements when an entity controls
another entity.
More specifically, INDAS 110:
Ÿ Requires an entity (a parent) that controls one or more other entities (subsidiaries) to
present consolidated financial statements;
Ÿ Defines the principle of control as the basis for consolidation and sets out how to identify
whether the investor controls the investee;
Ÿ Sets out the accounting requirements for the preparation of consolidated financial
statements, and
Ÿ Defines an Investment Entity and sets out an exception to consolidating particular
subsidiaries of an investment entity.
Objective
Consolidated Control Accounting Investment

Financial Statements requirements entities
(2) CONTROL AS THE BASIS FOR CONSOLIDATION

Simply speaking, the basic rule is:
Ÿ If an investor controls its investee => investor must consolidate;
Ÿ If an investor does NOT control its investee =>; investor does NOT consolidate.
So what is control?
An investor controls an investee when the investor:
Ÿ Is exposed to, or has right to variable returns from its involvement with the investee;
Ÿ Has the ability to affect those returns
Ÿ Through its power over the investee.
26.2
INDAS 110
(3) HOW TO ASSESS CONTROL?
Ÿ As per IndAS 110, an investor needs to determine whether it controls an investee and if yes
then the investor would be treated as a parent and the investee would be treated as a
subsidiary of the parent.
Ÿ An investor controls an investee if and only if the investor has all of the following three
elements:
Power over the Exposure, or Ability to use power Control over the
investee
+ right,to veriable
returns from
the investee
+ over the investee to
affect the
investore’s returns
= investee
Ÿ After doing an initial assessment of control over an investee, the investor should reassess
the control over the investee when there are changes to one or more of the three elements of
control mentioned above.
Ÿ Further, there may be situations where the investor is not the only one who control the
investee and it may need to act in co-operation with any other entity. There may also be a
situation where there is no investor who individually controls the investee. In such scenario,
the investor would account for the interest in such investees in accordance with other
applicable Ind AS such as Ind AS 111 for joint arrangement, Ind AS 28 for investments in
associates or Ind AS 109 for financial instruments.
26.3
INDAS 110
(4) POWER
Power is the existing rights that give the current ability to direct the relevant activities. Let's
break it down a bit:
Ÿ The rights must be substantive, not only some minor rights;
Ÿ The ability must be current, exercisable in the present time;
Ÿ The relevant activities must be significant and related to major activities of investee.
Examples of activities related to operating and financing activities that can be relevant
activities include, but not limited to:
Selling and purchasing Managing financial Selecting , acquiring or

of good and services assets during their life disposing of assets
(including upon default)
Researching and Determining a funding Establishing operating

developing new products structure or obtaining and capital decisions of
of processes funding th investee , including
budgets
Appointing ,terminating and

remunerating an investee’s key
management personnel or service
providers
In simple situations, control can be demonstrated through voting rights. If an entity acquires
over 50% of voting rights, entity controls the investee;
However, in complex situations, voting rights may not be the sole indicator. As required by
IndAS, the principle of substance over form shall prevail.
When assessing whether an investor controls an investee, more than one factor need to be
considered. INDAS 110 contains guidance in this area.
26.4
INDAS 110
Apply following steps to assess control
· Check the purpose of the Investee – why it has been formed
· What is the design of the Investee (Firm, Trust, Listed Company, Private Company,
Society, SPV etc) and how it is controlled i.e. through voting power, shareholders'
agreement, Contractual arrangement?
· Who takes the decision (who is decision maker) on relevant activities of the Investee -
which investor is able to direct the activities that most significantly affect those returns
consistently with the treatment of concurrent decision making rights.
· Whether the decision maker is empowered/has the right to take decision – i.e. who has the
power? The rights of the investor could be substantive rights or protective rights.
Substantive rights:
Ownership of more than fifty percent of the voting rights, generally gives an investor the
power. But this could be subject to regulatory restrictions, rights held by the other parties.
Thus the voting rights may not be substantive.
Example of Substantive Rights:

Ÿ Rights in the form of voting rights (or potential voting rights) of an investee;
Ÿ rights to appoint, reassign or remove members of an investee's key management personnel
who have the ability to direct the relevant activities;
Ÿ Rights to direct the investee to enter into, or veto any changes to, transactions for the
benefit of the investor; and
Ÿ The investee's key management personnel are related parties of the investor (for example,
the chief executive officer of the investee and the chief executive officer of the investor
are the same person).
Ÿ The majority of the members of the investee's governing body are related parties of the
investor.
Ÿ Other rights (such as decision-making rights specified in a management contract) that give
the holder the ability to direct the relevant activities.
Protective rights:
Protective rights are designed to protect the interests of their holders without giving that
party power over the investee to which those rights relate. An investor that holds only
protective rights cannot have power or prevent another party from having power over an
investee. Protective rights relate to fundamental changes to the activities of an investee or
apply in exceptional circumstances.
26.5
INDAS 110
FORM OF RIGHT ILLUSTRATION
Voting rights or potential voting rights of an An investor holding majority of the equity share
investee (this is further explained subsequently capital of an investee. Concepts of power
in this unit). through voting or potential voting rights are
further discussed in detail under Heading Voting
Right of this unit.
Rights to appoint, reassign or remove members An investor having right to appoint majority of
of an investee's key management personnel who the members of the Board of Director who have
have the ability to direct the relevant activities. power to take decisions related to relevant
activities.
Rights to appoint or remove another entity that Right with an investor to appoint or remove an
directs the relevant activities. asset manager who takes decisions related to
investments / divestments by a venture capital
fund.
Rights to direct the investee to enter into, or Right with an investor to direct the investee to
veto any changes to, transactions for the sell all of its outputs to a group company of the
benefit of the investor. investor at the price determined by investor
Rights to direct the investee to enter into, or Right with an investor to direct the investee to
veto any changes to, transactions for the sell all of its outputs to a group company of the
benefit of the investor. investor at the price determined by investor
Other rights (such as decision-making rights Right related to relevant activities given to a
specified in a management contract) that give single investor by all other investors through a
the holder the ability to direct the relevant shareholders' agreement
activities.
In most of the case where the investee has a range of relevant activities and decisions are
required to be taken on a continuous basis for those activities then it will be voting or similar
rights that give an investor power over the investee.
26.6
INDAS 110
Type of rights held by Type of rights held by Conclusion on
investor other parties ‘power’?
Substantive
+ Protective
= Investor has power
Protective
+ Substantive
= other parties have
power
Substantive
+ Substantive
= Further evaluation
needed
4.1 FRANCHISES
One example of protective rights can be of rights of a franchisor in a franchise agreement. In a

franchise agreement, the investee i.e. the franchisee usually give the franchisor the rights that
are related to protect the franchise brand. Following are some of the salient features of a
franchise arrangement which indicates that the rights of a franchisor in a franchise agreement
are protective rights:
1. Franchisor's right do not give it ability to direct relevant activities of Franchisee.
2. Other party have current ability to direct relevant activities of the franchisee.
3. Franschisor's rights do not affect the rights of others to take decision about relevant
activities.
4. Franchisee operates the business for its own account.
Based on above features, it can be said that Franchisor doesn't have substantive rights over the
Franchisee.
26.7
INDAS 110
4.2 POWER THROUGH VOTING RIGHTS
In the most straightforward cases, the investor that holds a majority of voting rights has power
over an investee. However, there can be certain cases where an investor can have power even if
it holds less than a majority of the voting rights of an investee.
A. Power with a majority of the voting rights

An investor that holds more than half of the voting rights of an investee has power in the
following situations:
A majority of the members of the

The relevant activities are directed governing body that directs the
by a vote of the holder of the majority OR relevant activities are appointed by a
of the voting rights vote of the holder of the majority of
the voting rights
For example, in case of a company where the decisions related to relevant activities are taken by
Board of Directors of the company and the Board members are appointed by shareholder holding
majority of the voting rights. Then the shareholder holding majority of the voting rights has
power over the company.
B. Power without a majority of voting rights

There can be certain cases where an investor can have power even if it holds less than a majority
of the voting rights of an investee. Following are the examples of power without majority voting
rights:
Contractual Rights from other

The investor’s voting
arrangement with other contractual
rights
vote holders arrangements
Potential voting rights Combination of all of

above
26.8
INDAS 110
(a) Contractual arrangement with other vote holders
An investor, who is not holding voting rights that are sufficient to given it power over the
investee, may enter into a contract with other vote holders to give the investor rights to
exercise voting rights which are sufficient to have power over the investee. In such case, the
investor would direct the other vote holders on how they should vote whereby the investor gets
power to direct the decision related to relevant activities.
(b) Rights from other contractual arrangements

Apart from holding voting rights, an investor might be having decisions-making rights related to
relevant activities of the investee pursuant to a contractual arrangement. Such contractual
rights in combination with voting rights may give investor power to direct the relevant activities
like manufacturing process of the investee or other operating and financing activities of the
investee.
However, in the absence of any other rights, economic dependence of an investee on the investor
(such as relations of a supplier with its main customer) does not lead to the investor having power
over the investee.
(c) The investor's voting rights

There may be certain situations where even though an investor is not holding majority of the
voting rights, but the voting rights held by it are sufficient to give it practical ability to have
power over the investee unilaterally. Generally, this is termed as de-facto control.
(d) Potential voting rights

Potential voting rights are rights to obtain voting rights of an investee, such as those arising
from convertible instruments or options or forward contracts. Those potential voting rights
are considered only if the rights are substantive as per the guidance discussed earlier.
When considering potential voting rights, an investor shall consider the purpose and design of
the instrument giving those rights as well as any other benefits that the investor would get from
the exercise of those rights.
Potential voting rights are to be considered in combination with voting or other decisions-making
rights that the investor might have to assess whether investor has power or not.
26.9
INDAS 110
4.3 EXPOSURE, OR RIGHTS, TO VARIABLE RETURNS FROM AN
INVESTEE
When assessing whether an investor has control of an investee, the investor determines
whether it is exposed, or has rights, to 'variable returns' from its involvement with the investee.
Variable returns are returns that are not fixed and have the potential to vary as a result of the
performance of an investee. Variable returns can be only positive, only negative or both positive
and negative. It should be noted that the term used is 'returns' and not 'benefits' which are
often interpreted as implying only positive returns.
It must also be noted that the term 'returns' includes within its scope both (a) direct returns
(which are mostly financial returns), as well as (b) synergistic returns, which are more indirect.
Following are some of the examples of variable returns:
Determination of whether a portion of an investee is a deemed separate entity
Returns that are not available

Remuneration for servicing to other interest holders
Dividends other distributions an investee’s assets or for example, an investor might
liabilities Fees and exposure use its assets in combination
of economic benefits from an
to loss from providing credit or with the assets of the investee
investee (eg interest from debt such as combining operating
securities) liquidity support Residual
functions to achive economies
Changes in the value of the interest in the investee’s of scale , cost saving, sourcing
investor’s investment in assets and liabilities on scarce products, gaining access
that investee liquidationnTax benefits to proprietary knowledge or
Access to future liquidity limiting some operations or
assets, to enhance the value of the
investor’s other assets.
Exposure to variable returns is not in itself enough to conclude the assessment of control. An
investor should have power over the investee and the ability to use its power to affect the
amount of the investor's returns from its involvement with the investee. For example, it is
common for a lender to have an exposure to variable returns from a borrower through interest
payments that it receives from the borrower, that are subject to credit risk. However, the
lender would not control the borrower if it does not have the ability to affect those interest
payments (which is frequently the case).
4.4 REPUTATIONAL RISK

During the financial crisis, some financial institutions provided funding or other support to
securitization or investment vehicles because they established or promoted those vehicles.
Rather than allowing them to fail and facing a loss of reputation, the financial institutions
stepped in, and in some cases took control of the vehicles. Having reputational risk in isolation is
not an appropriate basis for consolidation. The term 'reputational risk' relates to the risk that
failure of an investee would damage an investee's reputation and, therefore, that of an investor
26.10
INDAS 110
or sponsor, compelling the investor or sponsor to provide support to an investee in order to
protect its reputation, even though the investor or sponsor has no legal or contractual
requirement to do so.
Reputational risk is part of an investor's exposure to risks and rewards, albeit (although) a risk
that arises from non-contractual sources. Therefore, when assessing control, reputational risk
is a factor to consider along with other facts and circumstances. It is not an indicator of power in
its own right, but may increase an investor's incentive to secure rights that give the investor
power over an investee.
26.11
INDAS 110
(5) ACCOUNTING REQUIREMENTS OF INDAS 110
(A) Consolidation procedures
In order to prepare consolidated financial statements, INDAS 110 prescribes the following
consolidation procedures:
1. Combine like items of assets, liabilities, equity, income, expenses and cash flows of the
parent with those of its subsidiaries;
2. Offset (eliminate):
Ÿ The carrying amount of the parent's investment in each subsidiary; and
Ÿ The parent's portion of equity of each subsidiary;
3. Eliminate in full intra group assets and liabilities, equity, income, expenses and cash flows
relating to transactions between entities of the group.
(B) Other accounting requirements
Except for basic consolidation procedures, INDAS 110 prescribes number of other rules for
preparing consolidated financial statements, such as:
Ÿ Presentation of non-controlling interests: in equity, but separately from the equity of
owners of the parent;
Ÿ Uniform accounting policies shall be used by both parent and subsidiary;
Ÿ The financial statements of the parent and the subsidiary shall have the same reporting
date;
Ÿ How to deal when the parent loses its control over subsidiary,
and number of other rules dealing with the specific circumstances.
Note:
If subsidiary uses a different accounting policy then in every subsequent year, when
consolidated financial statement are prepared by parent, adjustments to carrying amount of
Assets & Liabilities as presented in standalone financial statement of subsidiary would be
required so that in consolidated financial statement all Assets & Liabilities of group are valued
using same accounting policies (no exceptions permitted based on impracticability)
26.12
INDAS 110
(6) EXCEPTIONS IN INDAS 110
As we discussed above, when a parent controls a subsidiary, then it should consolidate.
But not always……. INDAS 110 sets the following exceptions from consolidation:
1. A parent does not need to present consolidated financial statements if it meets all of the
following conditions:
Ÿ It is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and
its other owners agree;
Ÿ Its debt or equity instruments are not traded in a public market;
Ÿ It did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory organization for the purpose of issuing any class of
instruments in a public market, and
Ÿ Its ultimate or any intermediate parent of the holding produces consolidated financial
statements available for public use that comply with INDASs.
2. POST-EMPLOYMENT BENEFIT PLANS OR OTHER LONG-TERM EMPLOYEE BENEFIT

PLANS to which supplies – they don't need to present consolidated financial statements;
Example
Company A has set up an Employee Gratuity Plan trust for the purpose of giving gratuity
benefits to its employees. The gratuity benefit given by the company is a post-employee
benefit plan which is accounted as per Ind AS 19. So, Company A is not required to evaluate
whether it controls the trust and should not consolidate it.
It may be noted that the Indian GAAP (i.e. the accounting standards under The Companies
(Accounting Standards) Rules, 2006) contained two exceptions from consolidation, which
are no longer applicable:
Ÿ When control is intended to be temporary; or
Ÿ When the subsidiary operates under severe long-term restrictions
3. INVESTMENT ENTITIES.
26.13
INDAS 110
(7) RELATIONSHIP WITH OTHER PARTIES
1. When assessing control, an investor shall consider the nature of its relationship with other
parties and whether those other parties are acting on the investor's behalf i.e. they are 'de
facto agents' of the investor. The determination of whether other parties are acting as de
facto agents requires judgment, considering not only the nature of the relationship but also
how those parties interact with each other and the investor.
2. A de factor agent relationship does not require a contractual arrangement between the
investor and the de facto agent.
3. A party is a de facto agent when the investor has, or those that direct the activities of the
investor have, the ability to direct that party to act on the investor's behalf.
4. An investor shall consider its de facto agent's decision-making rights and its indirect
exposure, or rights, to variable returns through the de facto agent together with its own
when assessing control of an investee.
5. Further, having a de facto agent does not necessarily mean that the investor controls the
investee. The investor still needs to perform the control evaluation as per the detailed
guidance discussed above.
6. When assessing control, an investor would consider its de facto agent's decision-making
rights and exposure (or rights) to variable returns together with its own as if the rights were
held by the investor directly.
26.14
INDAS 110
Example : 1
An investor holds 30% voting powers in an investee. One of the fellow subsidiaries of the
investor also holds 30% voting powers of the investee. If the investor believes that if has the
ability to direct the fellow subsidiary to act on behalf of the investor while exercising its
voting rights, then the investor may conclude that the fellow subsidiary is a de facto agent of
the investor. Accordingly, investor would be able to control the investee with ability to use 60%
of the voting rights. However, in case the fellow subsidiary holds just 10% voting rights of the
investee then the investor would not be able to control the investee with just 40% voting rights
(30% held by investor itself and 10% owned by de facto agent).
Following are the examples of other parties that, by the nature of their relationship, might act
as de facto agents for the investor:
Investor’s related parties
A party that received its interest in the investee as a contribution or loan

from the investor
A party that has agreed not to sell , transfer or encumber its interests in the
investee without the investor’s prior approval (excepts in case investor and
other party have right of prior approval and rights are bases on
mutually terms)
A party that cannot finance its operations without subordinated financial

support from the investor
Investee for which the majority of the members of board or similar body are
the same as those of the investor
A party that has a close business relationship with the investor , such as
the relationship between a professional sevice provider and one of
its significant clients.
Parties mentioned above are not necessarily de facto agents of the investor. However, the
investor needs to evaluate whether the parties following in the above categories are the de
facto agents or not.
26.15
INDAS 110
(8) INVESTMENT ENTITIES
Investment entity is an entity that:
1. Obtains funds from one or more investors for the purpose of providing those investor(s)
with investment management services;
2. Commits to its investor(s) that its business purpose is to invest funds solely for returns
from capital appreciation, investment income, or both, and
3. Measures and evaluates the performance of substantially all of its investments on a fair
value basis.
INDAS 110 sets the guidance and rules about determining whether the entity is an investment
entity or not. Typical characteristics of investment entities are:
Ÿ It has more than one investment;
Ÿ It has more than one investor;
Ÿ It has investors that are not related parties of the entity;
Ÿ It has ownership interests in the form of equity or similar interests.
Most investment entities CANNOT present consolidated financial statements and instead, they
need to measure an investment in a subsidiary at fair value through profit or loss in line with
INDAS - 109 Financial Instruments.
26.16
INDAS 110
In assessing whether an entity meets the definition of investment entity as above, the entity
shall consider whether it has the following typical characteristics of an investment entity:
More than one investment More than one investor
Typical characteristics of an investment

entity
Entity has ownership interests in the form of

Investors are not related parties of the entity
equity or similar interests
The absence of one or more of these typical characteristics does not necessarily disqualify an
entity from being classified as an investment entity but indicates that additional judgment is
required in determining whether the entity is an investment entity.
26.17
INDAS 110
8.1 EXIT STRATEGIES of INVESTMENT ENTITY
One feature that differentiates an investment entity from other entities is that an investment
entity does not plan to hold its investments indefinitely; it holds them for a limited period.
Because equity investments and non-financial asset investments have the potential to be held
indefinitely, an investment entity shall have an exit strategy documenting how the entity plans
to realize capital appreciation from substantially all of its equity investments and non-financial
asset investments.
An investment entity shall also have an exit strategy for any debt instruments that have the
potential to be held indefinitely, for example perpetual debt investments. The entity need not
document specific exit strategies for each individual investment but shall identify different
potential strategies for different types or portfolios of investments, including a substantive
time frame for exiting the investments. Exit mechanisms that are only put in place for default
events, such as a breach of contract or non-performance, are not considered exit strategies for
the purpose of this assessment.
Exit strategies can vary by type of investment:

Ÿ For investments in private equity securities, examples of exit strategies include an initial
public offering, a private placement, a trade sale of a business, distributions (to investors) of
ownership interests in investees and sales of assets (including the sale of an investee's assets
followed by a liquidation of the investee).
Ÿ For equity investments that are traded in a public market, examples of exit strategies
include selling the investment in a private placement or in a public market.
Ÿ For real estate investments, an example of an exit strategy includes the sale of the real
estate through specialized property dealers or the open market.
An investment entity may have an investment in another investment entity that is formed in
connection with the entity for legal, regulatory, tax or similar business reasons. In this case, the
investment entity investor need not have an exit strategy for that investment, provided that
the investment entity investee has appropriate exit strategies for its investments.
8.2 EARNINGS FROM INVESTMENTS
To be an investment entity, an entity must commit to its investors that its business purpose is to
invest funds solely for returns from capital appreciation, investment income, or both. An
entity is not an investment entity if the entity, or another member of the group containing the
entity obtains,or has the objective of obtaining, other benefits from the entity's investments
that are not available to other parties unrelated to the investee.
An investment entity may have a strategy to invest in more than one investee in the same
industry, market or geographical area in order to benefit from synergies that increase the
capital appreciation and investment income from those investees. An entity is not disqualified
from being classified as an investment entity merely because such investees trade with each
other.
26.18
INDAS 110
8.3 FAIR VALUE MEASUREMENT
An essential element of the definition of an investment entity is that it measures and evaluates
the performance of substantially all of its investments on a fair value basis, because using fair
value results is more relevant information than, for example, consolidating its subsidiaries or
using the equity method for its interests in associates or joint ventures. In order to
demonstrate that it meets this element of the definition, an investment entity:
1. Provides investors with fair value information and measures substantially all of its
investments at Fair Value wherever required by INDAS and;
2. Reports fair value information internally to the entity's key management personnel, who
use fair value as the primary measurement for evaluating the performance of all of its
investments to make decisions.
In order to meet the requirement of measuring investments at fair value, an investment entity
would:
a) Elect the exemption from applying the equity method in IndAS 28 for its investments in
associates and joint ventures; and
b) Measure its financial assets at fair value using the requirements in IndAS 109.
An investment entity may have some non-investment assets, such as a head office property and
related equipment, and may also have financial liabilities. The fair value measurement element of
the definition of an investment entity applies to an investment entity's investments.
Accordingly, an investment entity need not measure its non-investment assets or its liabilities
at fair value.
8.4 MORE THAN ONE INVESTMENT
An investment entity typically holds several investments to diversify its risk and maximize its
returns. An entity may hold a portfolio of investments directly or indirectly, for example by
holding a single investment in another investment entity that itself holds several investments.
There may be times when the entity holds a single investment. However, holding a single
investment does not necessarily prevent an entity from meeting the definition of an
investment entity. For example, an investment entity may hold only a single investment when the
entity:
26.19
INDAS 110
is in its Start-up period and has not yet identified suitable investments
and, therefore, has not yet executed its investment plan
has not yet made other investments to replace those it has disposed of
IS established to pool investors funds to invest in a single investment

when that investment is unobtainable by individual investors (e.g. when the
required minimum investment is too high for an individual investor )
is in the process of liquidation
8.5 MORE THAN ONE INVESTOR

An investment entity would have several investors who pool their funds to gain access to
investment management services and investment opportunities that they might not have had
access to individually. Having several investors would make it less likely that the entity, or other
members of the group containing the entity, would obtain benefits other than capital
appreciation or investment income.
Alternatively, an investment entity may be formed by, or for, a single investor that represents
or supports the interests of a wider group of investors (e.g. a pension fund, government
investment fund or family trust).
There may also be times when the entity temporarily has a single investor. For example, an
investment entity may have only a single investor when the entity:
a) Is within its initial offering period, which has not expired and the entity is actively
identifying suitable investors;
b) Has not yet identified suitable investors to replace ownership interests that have been
redeemed; or
c) Is in the process of liquidation
Unrelated Investors
An investment entity has several investors that are not related parties of the entity or other
members of the group containing the entity. Having unrelated investors would make it less likely
that the entity, or other members of the group containing the entity, would obtain benefits
other than capital appreciation or investment income.
However, an entity may still qualify as an investment entity even though its investors are related
to the entity.
For example, an investment entity may set up a separate 'parallel' fund for a group of its
employees (such as key management personnel) or other related party investor(s), which mirrors
the investments of the entity's main investment fund. This 'parallel' fund may qualify as an
investment entity even though all of its investors are related parties.
26.20
INDAS 110
8.6 EXEMPTIONS TO INVESTMENT ENTITIES
An investment entity shall

Ÿ Not consolidate its subsidiaries or apply IndAS 103 'Business Combinations' when it obtains
control of another entity; and
Ÿ Measure an investment in a subsidiary at fair value through profit or loss in accordance
with IndAS 109.
If an investment entity has a subsidiary that is not itself an investment entity and whose main
purpose and activities are providing services related to the investment entity's investment
activities, it shall consolidate that subsidiary and apply the requirements of IndAS 103 to the
acquisition of any such subsidiary. If the subsidiary that provides the investment-related
services or activities is itself an investment entity then the investment entity parent shall
measure that subsidiary at fair value through profit or loss.
A parent of an investment entity shall consolidate all entities that it controls, including those
controlled through an investment entity subsidiary, unless the parent itself is an investment
entity.
26.21
INDAS 110
(9) CHANGE IN CLASSIFICATION
Case 1:
becomes
Investment Entity Non-Investment Entity
(which was not preparing CFS)
Ÿ Start Consolidation from the date of change of status when it becomes Non-Investment
entity
Ÿ Net Assets, NCI and Goodwill/GBP shall be computed on date of reclassification of status
Case 2:
Non-Investment Entity becomes

(having subsidiary and Investment Company
preparing CFS) (Exemped frm CFS)
Ÿ On the date of change of Status, we have to de-recognize Net Assets of subsidiary, NCI and
Goodwill/GBP if any and Investment in Subsidiary shall be recorded at Fair Value.
9.1 ACCOUNTING FOR A CHANGE IN INVESTMENTENTITY STATUS

A parent that either ceases to be an investment entity or becomes an investment entity shall
account for the change in its status prospectively from the date at which the change in status
occurred.
(a) Accounting when an entity ceases to be an investment entity

When an entity ceases to be an investment entity, it shall apply Ind AS 103 to any subsidiary that
was previously measured at fair value through profit or loss. The date of the change of status
shall be the deemed acquisition date. The fair value of the subsidiary at the deemed acquisition
date shall represent the transferred deemed consideration when measuring any goodwill or gain
from a bargain purchase that arises from the deemed acquisition. All subsidiaries shall be
consolidated in accordance with the consolidation principles discussed above in this unit.
26.22
INDAS 110
(b) Accounting when an entity becomes an investment entity
When an entity becomes an investment entity, it shall cease to consolidate its subsidiaries at the
date of the change in status (except for any subsidiary that itself is not an investment entity but
provide services related to the investment entity's investment activities. Such subsidiaries
shall be continued to be consolidated). The investment entity shall apply the requirements of loss
of control explained earlier in previous chapter under INDAS 103 to those subsidiaries that it
ceases to consolidate as if the investment entity had lost control of those subsidiaries at that
date.
26.23
INDAS 110
(10) REPORTING PERIOD OF PARENT AND SUBSIDIARY
1. The financial statements of the parent and its subsidiaries used in the preparation of the
consolidated financial statements shall have the same reporting date.
2. When the end of the reporting period of the parent is different from that of a subsidiary
(e.g. parent's financial year ends on 31 March 20X1 but the subsidiary's financial year ends on
31 December 20X0), the subsidiary prepares, for consolidation purposes, additional
financial information as of the same date as the financial statements of the parent to enable
the parent to consolidate the financial information of the subsidiary, unless it is
impracticable to do so.
3. If it is impracticable to do so, the parent shall consolidate the financial information of the
subsidiary using the most recent financial statements of the subsidiary adjusted for the
effects of significant transactions or events that occur between the date of those financial
statements and the date of the consolidated financial statements. In any case, the
difference between the date of the subsidiary's financial statements and that of the
consolidated financial statements shall be no more than three months.
4. The length of the reporting periods and any difference between the dates of the financial
statements shall be the same from period to period. This means that if the financial
statements of a subsidiary used for consolidation in previous periods were ending on
different dates than that of the parent whereas the financial statements used for current
period end on the same date as that of the parent then the comparatives for previous period
should be restated to have comparison of equivalent periods.
Example 2
A Limited, an Indian Company has a foreign subsidiary; B Inc. Subsidiary B Inc. has taken a
long-term loan from a foreign bank, which is repayable after the year 20X9. However, during
the year ended 31st March, 20X2, it breached one of the conditions of the loan, as a
consequence of which the loan became repayable on demand on the reporting date.
Subsequent to year end but before the approval of the financial statements, B Inc. rectified
the breach and the bank agreed not to demand repayment and to let the loan run for its
remaining period to maturity as per the original
loan terms. While preparing its standalone financial statements as per IFRS, B Inc. has
classified this loan as a current liability in accordance with IAS 1 'Presentation of Financial
Statements'.
Whether A limited is required to classify such loan as current while preparing its
consolidated financial statement under Ind AS?
26.24
INDAS 110
Solution:
As per paragraph 74 of Ind AS 1, where there is a breach of a material provision of a long-term
loan arrangement on or before the end of the reporting period with the effect that the
liability becomes payable on demand on the reporting date, the entity does not classify the
liability as current, if the lender agreed, after the reporting period and before the approval of
the financial statements for issue, not to demand payment as a consequence of the breach.
The above position under Ind AS 1 differs from the corresponding position under IAS 1. As
per paragraph 74 of IAS 1, when an entity breaches a provision of a long-term loan
arrangement on or before the end of the reporting period with the effect that the liability
becomes payable on demand, it classifies the liability as current, even if the lender agreed,
after the reporting period and before the recognized on of the financial statements for issue,
not to demand payment as a consequence of the breach. An entity classifies the liability as
current because, at the end of the reporting period, it does not have an unconditional right to
defer its settlement for at least twelve months after that date.
Accordingly, the loan liability recognized as current liability by B Inc. in its standalone
financial statements prepared as per IFRS, should be aligned as per Ind AS in the
consolidated financial statements of A Limited and should be classified as non-current in the
consolidated financial statements of A Limited in accordance with lnd AS 1.
(11) ALLOCATING SHARE IN PROFIT / LOSS TO

NON-CONTROLLING INTEREST
A parent shall present non-controlling interests in the consolidated balance sheet within equity,
separately from the equity of the owners of the parent.
An entity shall attribute the profit or loss and each component of other comprehensive income
to the owners of the parent and to the non-controlling interests. The entity shall also attribute
total comprehensive income to the owners of the parent and to the non-controlling interests
even if this results in the non-controlling interests having a deficit balance.
26.25
INDAS 110
(12) CONTROL OF SPECIFIED ASSETS
An investor shall consider whether it treats a portion of an investee as a deemed separate entity
and, if so, whether it controls the deemed separate entity. A deemed separate entity is often
called a 'silo'.
An investor shall treat a portion of an investee as a deemed separate entity if and only if the
following condition is satisfied:
Determination of whether a portion of an investee is a deemed separate entity
specified assets of the In substance , more of the

investee (and related credit Parties other then those with returns from the specified
enhancements, if any) are the specified liability do not assets can be used by the
the only source of payment have rights or obligations remaining investee and none
for specified liabilities of, or related to the specified assets of the liabilities if the deemed
specified other interest in, or to residual cash flows separates entity are payable
the investee. from the assets. from the assets of the
remaining investee.
Thus, in substance, all the assets, liabilities and equity of that deemed separate entity are ring-
fenced from the overall investee.
For example, an investee is a mutual fund and under the investee there are multiple sub-funds
established with different investment objectives like debt-oriented funds, equity-oriented
funds, etc. In such case, an assessment should be made as to whether the sub-funds are deemed
separate entities as per the conditions mentioned above.
When the conditions mentioned above are satisfied, an investor shall assess whether it controls
the silo by applying the guidance of control evaluation i.e. whether the investor has power over
the silo, exposure or rights to variable returns from involvement with silo and whether it can use
that power to affect the returns of the silo.
If the investor controls the silo, the investor shall consolidate that silo. In that case, other
parties exclude that silo when assessing control of, and in consolidating, the investee.
For example, continuing with the above example on identification of a silo, if one of the sub-
funds is treated as a silo then the investor that controls that silo will consolidate that sub-fund.
Other parties who control other sub-funds will exclude the sub-fund controlled by the investor
in their control evaluation and consolidation.
26.26
INDAS 110
Example 3
Veera Limited and Zeera Limited are both in the business of manufacturing and selling of
Lubricant. Shareholders of Veera Limited and Zeera Limited agreed to join forces to benefit
from lower delivery and distribution costs. The business combination is carried out by setting
up a new entity called Meera Limited that issues 100 shares to Veera Limited shareholders and
50 shares to Zeera Limited shareholders in exchange for the transfer of the shares in those
entities. The number of shares reflects the relative fair values of the entities before the
combination. Also respective company's shareholders get the voting rights in Meera Limited
based on their respective shareholdings.
Determine the acquirer by applying the principles of Ind AS 103 'Business Combinations'
Solution:
As per para B15 of Ind AS 103, in a business combination effected primarily by exchanging
equity interests, the acquirer is usually the entity that issues its equity interests. However, in
some business combinations, commonly called 'reverse acquisitions', the issuing entity is the
acquiree. Other pertinent facts and circumstances shall also be considered in identifying the
acquirer in a business combination effected by exchanging equity interests, including:
The relative voting rights in the combined entity after the business combination - The acquirer
is usually the combining entity whose owners as a group retain or receive the largest portion of
the voting rights in the combined entity.
Based on above mentioned para, acquirer shall be the either of the combining entities (i.e. Veera
Limited or Zeera Limited) whose owners as a Group retain or receive the largest portion of the
voting rights in the combined entity.
Hence in the above scenario Veera Limited shareholder gets 67% Share [(100/150) x100] and
Zeera Limited shareholder gets 33.33% share in Meera Limited. Hence Veera Limited is
acquirer as per the principles of Ind AS 103.
26.27
INDAS 110
Student Notes:-
26.28
INDAS 110
TOPIC 12
INDAS 36 -
IMPAIRMENT OF ASSETS
Quote:
Explore, Learn, Discover…..
Then when u find your thing, OWN It!
Index
S.No. Content Page No.
1 NON – APPLICABILITY 12.2
2 RELEVANT DEFINITIONS 12.3
3 INDICATIONS OF IMPAIRMENT 12.4
4 IDENTIFYING ASSETS FOR IMPAIRMENT 12.5
5 MEASUREMENT OF RECOVERABLE AMOUNT 12.6
6 RECOGNISING IMPAIRMENT LOSS 12.10
7 IMPAIRMENT LOSS OF CGU & GOODWILL 12.12
8 REVERSAL OF IMPAIRMENT LOSS 12.16
9 DISCLOSURES 12.20
INDAS 36
(1) NON-APPLICABILITY
1. Inventories (as covered in Ind AS 2)
2. Contract assets and assets arising from costs to obtain or fulfill a contract (Ind AS 115)
3. Deferred tax assets (Ind AS 12)
4. Assets arising from employees benefits (Ind AS 19) i.e. Plan Assets
5. Biological Assets measured at fair value less cost to sell (Ind AS 41)
(It means Biological Assets measured at Cost are subject to Impairment under this
standard only i.e. under IndAS 36)
6. Deferred acquisition costs and intangible assets arising from insurance contracts (Ind AS
104)
7. Non-current assets (or disposal groups) classified as held for sale (as covered in Ind AS
105)
8. Financial Assets (within the scope of Ind AS 109 & 32 )
Example of Fin. Assets are Investment Equity Shares/Derivative Contracts/Other
Securities; Trade Receivables/Loans Given etc.
INDAS 36 applies to financial assets classified as:

1. Subsidiaries, as defined in Ind AS 110, Consolidated Financial Statements.
2. Associates, as defined in Ind AS 28 Investments in Associates and Joint Ventures
3. Joint ventures, as defined in Ind AS 111, Joint Arrangements
Author's Note:
INDAS 36 will be applicable to Investment in Subsidiaries, Associates and JV only when these
Investments are recognised in SFS as per Cost Model under IndAS 27.
12.2
INDAS 36
2.RELEVANT DEFINITIONS
1. Carrying amount is the amount at which an asset is recognised after deducting any
accumulated depreciation (amortisation) and accumulated impairment losses thereon.
2. A Cash-generating unit is the smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or groups of
assets.
3. Corporate assets are assets other than goodwill that contribute to the future cash flows of
both the cash-generating unit under review and other cash-generating units.
4. Costs of disposal are incremental costs directly attributable to the disposal of an asset or
cash-generating unit, excluding finance costs and income tax expense.
5. Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date (refer Ind AS
113 Fair Value Measurement).
6. An Impairment loss is the amount by which the carrying amount of an asset or a cash-
generating unit exceeds its recoverable amount.
Carrying Recoverable Impairment

Amount Amount Loss
7. The Recoverable amount of an asset or a cash-generating unit is the higher of its fair value
less costs of disposal and its value in use.
8. Useful life is either:

a) The period of time over which an asset is expected to be used by the entity; or
b) The number of production or similar units expected to be obtained from the asset by the
entity.
9. Value in use is the present value of the future cash flows expected to be derived from an
asset or cash-generating unit and from its disposal at the end of its useful life. (Disposal at
the end of useful life means Terminal Cash Flows)
12.3
INDAS 36
3. INDICATIONS OF IMPAIRMENT
In assessing whether there is any indication that an asset may be impaired, an entity shall consider,
as a minimum, the following indications:
A.EXTERNAL SOURCE OF INFORMATION

The following are external source of information which may indicate that an asset is impaired:
a) During the period, an asset's market value has declined significantly more than would be
expected as a result of the passage of time or normal use.;
b) Significant changes with an adverse effect on the entity have taken place during the period,
or will take place in the near future, in the technological, market, economic or legal
environment in which the entity operates or in the market to which an asset is dedicated;
c) Market interest rates or other market rates of return on investments have increased
during the period, and those increases are likely to affect the discount rate used in
calculating an asset's value in use and decrease the asset's recoverable amount materially;
and
d) The carrying amount of the net assets of the entity is more than its market capitalization
(BV Net Asset > Market Value Net Asset).
B.INTERNAL SOURCE OF INFORMATION

The following are internal source of information which may indicate that an asset is impaired:
a) Evidence is available of obsolescence or physical damage of an asset;
b) Significant changes with an adverse effect on the entity have taken place during the period, or
are expected to take place in the near future, in the extent to which, or manner in which, an
asset is used or is expected to be used. These changes include the asset becoming idle, plans
to discontinue or restructure the operation to which an asset belongs, plans to dispose of an
asset before the previously expected date, and reassessing the useful life of an asset as finite
rather than indefinite;
c) Evidence is available from internal reporting that indicates that the economic performance of
an asset is, or will be, worse than expected. Such evidence may include:
(i) Cash flows for acquiring the asset, or subsequent cash needs for operating or maintaining it,
that are significantly higher than those originally budgeted;
(ii) Actual net cash flows or operating profit or loss flowing from the asset that are
significantly worse than those budgeted;
(iii) A significant decline in budgeted net cash flows or operating profit, or a significant increase
in budgeted loss, flowing from the asset; or
(iv) Operating losses or net cash outflows for the asset, when current period amounts are
aggregated with budgeted amounts for the future.
The above list is not exhaustive. An entity may identify other indications that an asset
may be impaired.
12.4
INDAS 36
INDICATIONS OF IMPAIRMENT IN CASE OF INVESTMENT IN
SUBSIDIARY JOINT VENTURE OR ASSOCIATE
(i) The carrying amount of the investment in the separate financial statements exceeds the
carrying amounts in the consolidated financial statements of the investee's net assets,
including associated goodwill;
For Example: Investment Value in SFS of Holding Co. is 14.50 Lacs; Value of Net Assets
including Goodwill of Sub. in CFS is 15 Lacs out of which 90% belongs to holding's share i.e.
13.50 lacs.
OR
(ii) The dividend declared by subsidiary exceeds the total comprehensive income of the
subsidiary, jointly controlled entity or associate in the period the dividend is declared.
Exception of Increase in Market Interest Rate: Even though the market interest rate
increases but:
1. Discount rate is unlikely to be affected due to increase in Market Interest Rate
2. Discount rate is likely to be affected but it is unlikely that there will be a material decrease
in recoverable amount because future cash flows are also likely to increase.
3. Discount rate is likely to be affected but decrease in Recoverable Amount is unlikely to
result in a material impairment loss.
Due to Covid 19 pandemic this IndAS was applied by Various entities on its Non financial Assets
as they were experianced significant cancellation of business orders
4. IDENTIFYING AN ASSET THAT MAY BE IMPAIRED
Asset is impaired only when Carrying Amount is more than Recoverable

Amount
CA – RA = IMPAIRMENT LOSS
Irrespective of any indication of In case of any indication of impairment at

impairment, Following Assets shall be the end of each reporting period:
Tested for Impairment at least annually:
Intangible Assets with indefinite useful life ALL OTHER ASSETS
(INDAS 38)
Eg. PPE, Investment Properties
Intangible Assets not yet available for Use.
Goodwill acquired in a Business Combination.
12.5
INDAS 36
5. MEASUREMENT OF RECOVERABLE AMOUNT
RECOVERABLE AMOUNT
Higher of -
Fair Value less cost of disposal
and
Value in Use
5.1 FAIR VALUE less COST of DISPOSAL

FAIR VALUE is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date (Ind AS 113
Fair Value Measurement).
Steps for assessing Fair value less costs to sell
First Preference: Binding sale agreement
Second Preference: Active market

Current bid price
If current bid prices not available, the price of the most recent transaction
Third Preference: Best information available at the end of the reporting date
If all the above are not available: Ignore Fair value less costs to sell, take Value in use only.
COST OF DISPOSAL:
Examples of such costs are legal costs, stamp duty and similar transaction taxes, costs of removing
the asset, and direct incremental costs to bring an asset into condition for its sale.
However, termination benefits (as defined in Ind AS 19) and costs associated with reducing or
reorganizing a business following the disposal of an asset are not direct incremental costs to
dispose of the asset.
5.2 VALUE IN USE:

VALUE IN USE is the present value of the future cash flows expected to be derived from an asset
or cash-generating unit.
Primarily two key decisions are involved in determining value in use:
Estimating Pre - Tax

future cash Discount rate to
flows be used
12.6
INDAS 36
When estimating expected future cash flows, the following rules apply:
Reasonable and supportable assumptions of

management's best estimates of the economic
conditions over the remaining useful life of the asset
Greater weight should be given to external evidence
Most recent Financial budgets or forecasts that have

been approved by Management
Projections should cover a maximum period five years,

unless a longer period can be justified.
F The benefit of the future reorganization proposed to be taken place such as

Amalgamations, Business Combinations should not be taken into account in calculating
value-in-use.
F Income tax receipts or payments shall be ignored while estimating future cash flows.
Because the discount rate is determined on a pre-tax basis, future cash flows are also
estimated on a pre-tax basis.
Foreign currency future cash flows:

Future cash flows are estimated in the currency in which they will be generated and then
discounted using a discount rate appropriate for that currency. An entity translates the present
value using the spot exchange rate at the date of the value in use calculation.
Discount rate:
The discount rate should be a pre-tax When an asset-specific rate is not directly
market rate that reflects current market available from the market, the entity uses
assessments of the: surrogates to estimate the discount rates.
· Time Value of Money · Entity's weighted average cost of capital
· Risks specific to the Assets · Entity's incremental borrowing rate and
Other market borrowing rates
12.7
INDAS 36
Value in Use
Sum of Applicable
Year wise estimated X discount rate
future cash flows
Includes Excludes When an asset - It should be a pre-

specific rate is not tax rate (rates)
directly available from that reflect(s)
the market, the entity current market
uses surrogates to assessments of
Projections of Projections of cash Net cash flows, to estimate the discount rates.
cash inflows from outflows, which be received / paid
the continuing necessarily for the disposal of
use of the asset incurred to the asset at the end
generate the cash of its useful life Time value of Risks specific to
inflows from the asset for which
money
continuing use of the future cash
the asset and can flow estimates have
be directly not been adjusted
attributed to the
asset
Entity's Entity's Other market
weighted incremental borrowing
average cost borrowing rate rates.
of capital
Future Improving Cash inflows Income tax
restructuring or enhancing or outflows receipts or
to which an the asset’s from payments
entity is not yet performance financing
committed activities
12.8
INDAS 36
COVID-19 IMPACT ON INDAS 36
FAQ 9 (VALUE IN USE)
In view of significant uncertainty and turbulent times caused by rapidly evolving COVID-19
impact, what would be possible approach to estimate the future cash flows?
ANSWER:
Ind AS 36 provides two approaches that can be used to project cash flows (i) the traditional
approach, which uses a single cash flow projection, or most likely cash flow; and (ii) the expected
cash flow approach, which uses multiple probability-weighted cash flow projections.
To better reflect uncertainties in estimated cash flows, the expected cash flow approach should
be used in determining value in use. Expected cash flow approach is more effective measurement
tool than the traditional approach due to following reasons:
· In developing a measurement, the expected cash flow approach considers all expectations
about possible cash flows instead of the single, most likely, future cash flow. For example, a
cash flow might be Rs. 100, Rs. 200 or Rs. 300 with probabilities of 10 per cent, 60 per cent
and 30 per cent, respectively. The expected cash flow is Rs. 220. The expected cash flow
approach thus differs from the traditional approach by focusing on direct analysis of the cash
flows in question and on more explicit statements of the assumptions used in the
measurement.
· It calculates a range of expected cash flows, instead of only considering the most likely case.
Considering the disruptions in economy due to COVID 19, it may be helpful to consider using an
expected cash flow approach as opposed to the traditional approach to project cash flows since
the expected cash flow approach inherently requires a more explicit consideration of the wider
than normal range of possible future outcomes
5.3 CONTRASTING FAIR VALUE AND VALUE IN USE
Fair value differs from value in use. Fair value reflects the assumptions that market participants
would use when pricing the asset. In contrast, value in use reflects the effects of factors that may
be specific to the entity and not applicable to entities in general.
For example, fair value does not reflect any of the following factors to the extent that they would
not be generally available to market participants:
(a) Additional value derived from the grouping of assets (such as the creation of a portfolio of
investment properties in different locations);
(b) Synergies between the asset being measured and other assets;
(c) Legal rights or legal restrictions that are specific only to the current owner of the asset;
and
(d) Tax benefits or tax burdens that are specific to the current owner of the asset.
12.9
INDAS 36
6.RECOGNISING AND MEASURING AN IMPAIRMENT LOSS
CHARGE TO CHARGE TO IF IL IS DEPRECIATION DEFERRED
P&L REVALUATION MORE THAN AFTER TAX
SURPLUS (OCI) CA IMPAIRMENT
Impairment loss Impairment loss of If Impairment loss Depreciation or DTA/DTL should
shall always be Assets carried at exceeds the Amortisation after be worked out as
recognised in SPL Revaluation Model carrying amount of Impairment should per IndAS 12 by
in case of Assets (e.g. IndAS 16) asset then the be charged on comparing Revised
not subject to shall be treated as Liability should be Revised CA less CA with its Tax
Revaluation. Revaluation recognised in residual value on Base.
Decrease. accordance with systematic basis
any related INDAS over its remaining
Impairment loss is (eg. IndAS 37) useful life.
recognised in OCI
to the extent it Entire CA shall be
does not exceed w/off.
the revaluation
surplus on the same
asset. Remaining IL
if any would be
transferred to SPL
Impairment loss
Whether asset is carried at

revalued amount?
No Yes
Recognised immediately No Whether revaluation

in profit or loss surplus exists?
Yes
Recognised immediately Recognised in OCI to the extent

in profit or loss to the that the impairment loss does
extent loss exceeds the not exceed the amount in the
revaluation surplus revaluation surplus for that same
asset (Refer Ind AS 16 also)
12.10
INDAS 36
Example 1:
Mercury Ltd. has an identifiable asset with a carrying amount of ` 1,000. Its recoverable amount is `
650. The tax rate is 30% and the tax base of the asset is ` 800. Impairment losses are not
deductible for tax purposes. What would be the impact of impairment loss on related deferred tax
asset / liability against the revised carrying amount of asset?
SOLUTION:
Identifiable assets Impairment Identifiable
before impairment loss assets after
loss impairment loss
Rs Rs Rs
Carrying amount 1,000 (350) 650
Tax Base 800 - 800
Taxable (deductible) 200 (350) (150)
temporary difference
Deferred tax liability 60 (105) (45)
(asset) at 30%
In accordance with Ind AS 12, the entity recognises the deferred tax asset to the extent that it is
probable that taxable profit will be available against which the deductible temporary difference
can be utilized.
12.11
INDAS 36
7. IMPAIRMENT LOSS OF A CASH-GENERATING UNIT
(CGU) AND GOODWILL
Identification of CGU :- A cash-generating unit is the smallest identifiable group of assets that
generates cash inflows that are largely independent of the cash inflows from other assets or
groups of assets.
F Always try to impair Individual Asset first for which indication of impairment exist and estimate
the recoverable amount of that individual asset.
F If it is not possible to estimate the recoverable amount of the individual asset, an entity is
required to determine the recoverable amount of the cash-generating unit to which the asset
belongs (the asset's cash-generating unit).
F When recoverable amount of asset can-not be determined for individual asset –

a) The asset's value in use cannot be estimated to be close to its fair value less costs of
disposal (for example, when the future cash flows from continuing use of the asset cannot
be estimated to be negligible); and
b) The asset does not generate cash inflows that are largely independent of those from other
assets.
F If recoverable amount cannot be determined for an individual asset, an entity identifies the
lowest aggregation of assets that generate largely independent cash inflows.
7.1 ALLOCATION OF ASSETS AND LIABILITIES TO CGU's

Carrying amount is the amount at which an asset is recognised after deducting any accumulated
depreciation (amortisation) and accumulated impairment losses thereon.
Remember one thing – Only those Assets and Liabilities should be considered in carrying amount of
CGU which are taken into account for determining Recoverable Amount (i.e. basis should be same)
ASSETS Includes only those assets that are directly

attributable or that can be allocated on reasonable
basis to CGU.
Goodwill and Corporate Assets (head office assets)
should also be included if they are allocable to CGU's on
reasonable basis.
LIABILITIES CA of Liabilities shall be considered in CA of CGU only
when the recoverable amount of CGU can-not be
determined without consideration of this liability.
12.12
INDAS 36
If recoverable amount of CGU is determined after considering liability then such liability must
be taken into account while calculating Carrying amount of CGU and VIU of CGU.
7.2 IMPAIRMENT OF GOODWILL

Goodwill does not generate cash flows independently of other assets or groups of assets and,
therefore, it will always be tested for impairment as part of a CGU or a group of CGUs.
As per INDAS 36 -
For the purpose of impairment testing, goodwill acquired in a business combination shall, from the
acquisition date, be allocated to each of the acquirer's cash-generating units, or groups of
cash-generating units, that is expected to benefit from the synergies of the combination,
irrespective of whether other assets or liabilities of the acquiree are assigned to those units or
groups of units.
7.3 IMPAIRMENT OF CORPORATE ASSETS

Corporate assets are assets other than goodwill that contribute to the future cash flows of both
the cash-generating unit under review and other cash-generating units. Corporate assets include
group or divisional assets such as the building of a headquarters or a division of the entity, EDP
equipment or a research center.
The distinctive characteristics of corporate assets are that:

a) They do not generate cash inflows independently of other assets or groups of assets; and
b) Their carrying amount cannot be fully attributed to the cash-generating unit under review.
Corporate Assets can-not be tested for impairment individually because they do not generate
separate cash flows. Therefore they are allocated on a reasonable basis to different CGU's
Corporate Assets – Allocable to CGU's Corporate Assets – Not Allocable to

CGU's
Apply Bottom-up Approach Apply Top Down Approach
Allocate the Carrying amount of Corp. Apply impairment testing of CGU

Assets to CGU's and applying impairment without considering carrying amount of
testing. Corp. Assets.
Impairment loss shall be apportioned Then Compare the RA of entire

between the assets of CGU and Corp. organization/entity with the CA of all
Assets in the ratio of related individual the assets and liabilities including CA of
Carrying Amount
Corp. Assets.
If any IL arise then such IL shall be
attributed to Corporate Assets only.
12.13
INDAS 36
So finally, when we allocate the Goodwill and Corporate Assets (if any) to a Cash Generating Unit;
it's time to calculate the Impairment Loss on CGU by comparing the Carrying Amount of the Unit
with its Recoverable Amount. But now question is how to allocate the total impairment loss on CGU
to its assets along with Goodwill and Corporate Assets……
The answer is…………… we have to allocate the impairment loss in following order:
1. First of all reduce the carrying amount of allocated Goodwill to CGU (if any)
2. Then the remaining IL shall be allocated to all other Assets including Corporate Assets on
pro rata basis of the carrying amount of each asset.
Remember one more thing we can-not allocate the impairment loss more than the carrying amount
of asset. It means after allocating impairment loss the revised carrying amount of asset can at
maximum be Zero not Negative.
No impairment loss is recognised for the asset if the related cash-generating unit is not
impaired. This applies even if the asset's fair value less costs of disposal is less than its
carrying amount.
7.4 HOW TO ALLOCATE GOODWILL AND CORPORATE ASSET TO

DIFFERENT CGUS
Allocation shall be done on reasonable basis. Reasonable basis may be:

1. Fair Values of CGUs acquired (for allocation of Goodwill);
2. If Fair Values are missing then reasonable basis can be the amounts calculated by multiplying
the Carrying Amount of each CGU with Useful Life thereof (CA x Useful Life).
3. If Useful life of CGUs is missing in the question, then we can take carrying amounts only as
proportion for allocation purpose.
Examples 2:
A global consumer products company, which allocates goodwill at the operating segment level,
purchases a company best-known for razors and razor blades. It has not previously manufactured
razors although its 'grooming products' operating segment does manufacture other shaving
products. The acquirer expects that it will be able to increase sales of its shaving products
through association with the target company's razors and through branding. No assets of the
acquired business are allocated to the grooming products operating segment but this segment will
benefit from the synergies of the business combination and therefore goodwill from the
acquisition will be allocated to it.
12.14
INDAS 36
Summary Diagram
We have considered in detail what may be included in the carrying amount and recoverable amount
of a CGU. The key point is that the same underlying assets and liabilities must be included in both.
The following summary provides an overview of the items that may be included:
Directly Goodwill Share of Net

attributable (grossed corporate Liabilities working
assets up) assets capital
7.5 NON-CONTROLLING INTERESTS – THE IMPACT ON GOODWILL

IMPAIRMENT TESTING
We all know that when an entity acquires a controlling stake in a subsidiary that is less than
100% of its equity, NCI arise and the measurement of NCI depends on use of following
methods:
1. Fair Value Method: It is also known as Full Goodwill method. Here share of NCI in Goodwill
is also recognised in the CFS.
2. Proportionate Share of Net Asset Method: Also called Partial Goodwill method. In this
method, the Recognised goodwill in CFS belongs to Parent only.
If method (2) above is followed, the CARRYING AMOUNT of that CGU comprises:
a) Both the parent's interest and the non-controlling interest in the identifiable net assets of
the CGU; and
b) The parent's interest in goodwill.
But part of the RECOVERABLE AMOUNT of the CGU determined in accordance with Ind AS 36
contains NCI's share of Goodwill also along with parent's share of Goodwill.
If an entity measures NCI as its proportionate interest in the net identifiable assets of a
subsidiary at the acquisition date, rather than at fair value, goodwill attributable to NCI is
included in the recoverable amount of the related cash-generating unit but is not recognised in
the parent's consolidated financial statements.
CONCLUSION:
As a consequence, an entity shall gross up the carrying amount of goodwill allocated to the unit to
include the goodwill attributable to NCI (notional goodwill). This adjusted carrying amount is then
compared with the recoverable amount of the unit to determine whether the cash generating unit
is impaired.
When Impairment losses arise, it is first charged to the Goodwill value. Here it is very important
to note that such impairment loss attributable to the Goodwill value also attributable to that
Notional Goodwill which belongs to NCI and that Impairment loss which belongs to Notional
Goodwill shall not be recognised in CFS. Only the impairment loss relating to the goodwill that is
allocated to the parent is recognised as a goodwill impairment loss.
12.15
INDAS 36
8. REVERSAL OF IMPIRMENT LOSS
GOODWILL - An impairment loss recognised for goodwill shall not be reversed in a subsequent
period. Since reversal will cause increase in Goodwill which is prohibited by IndAS 38 (increase in
goodwill is treated as increase in internally generated assets)
ASSETS other than Goodwill – If there is an Indication that shows Impairment Loss recognised
earlier may no longer exists or may have decreased, then entity shall revers the impairment loss
and accordingly recoverable amount is to be determined.
CONDITIONS OF REVERSAL OF IL:
Change in Estimate used to determine the Asset's recoverable amount since the last impairment
was recognised. Such change in estimate may include:
· Change in estimate of components of Fair Value less cost of disposal (if recoverable
amount was based on Fair Value)
· Change in the amount or timing of estimated future cash flows or in the discount rate (if
recoverable amount was based on Value in use)
INDICATORS OF REVERSAL OF IMPAIRMENT LOSS:
External –
· Asset's value has increased significantly during the period;
· Significant changes with a favorable effect on the entity have taken place during the
period, or will take place in the near future, in the technological, market, economic or legal
environment in which the entity operates or in the market to which the asset is dedicated;
and
· Market Interest rates or other market rates of return on investments have decreased
during the period, and it is directly affecting the discount rate used in calculating the
asset's value in use and increase the asset's recoverable amount materially.
Internal -
· Asset's performance has been significantly improved or will be improved which is
favourable for the enity. It may be because of Cost incurred during the period to improve
or enhance the performance or Cost incurred to restructured the operation during the
period.
· Evidence is available from internal reporting that indicates that the economic performance
of the asset is, or will be, better than expected.
MAXIMUM AMOUNT OF REVERSAL OF IMPAIRMENT LOSS:

Reversal shall not exceed the lower of following –
· Recoverable Amount Less Carrying Amount of Assets
· Earlier Impairment Loss – Saving in Depreciation/Amortisation due to impairment
(In short the increased carrying amount of an asset other than goodwill attributable to a reversal of an
impairment loss shall not exceed the carrying amount that would have been determined (net of
amortisation or depreciation) had no impairment loss been recognised for the asset in prior years.)
12.16
INDAS 36
RECOGNITION OF IMPAIRMENT LOSS:
Assets under Cost Model – Recognise immediately in Profit and Loss.
Assets under Revalued Model – Treat it as Revaluation Increase and recognise it in OCI, however
to the extent that an impairment loss on the same revalued asset was previously recognised in
profit or loss, a reversal of that impairment loss is also recognised in profit or loss.
REVERSAL OF IL OF CGU:
A reversal of an impairment loss for a cash-generating unit shall be allocated to the assets of
the unit, except for goodwill, pro rata with the carrying amounts of those assets.
REVIEW OF USEFUL LIFE, DEPRECIATION METHOD AND RESIDUAL VALUE:

Due to the indications existed as above it may be possible that there is change in estimated useful life of
assets, change in depreciation (amortization) method used, or change in estimated residual value. So be very
careful in this respect and we have to review such elements even if no impairment loss is reversed.
Example 3:
REVERSAL OF IMPAIRMENT LOSS:
As on 1/4/16 Original Cost of PPE = 30,00,000; Estimated Life = 12 years; Depreciation is done
under SLM Method
Therefore Original Depreciation = 2,50,000 pa
On 1/4/19, Fair Value of PPE was 27,00,000 (PPE is under Revaluation Model)
CA as on 1/4/19 = 30,00,000/12 X 9 = 22,50,000
Therefore, Revaluation Surplus = 4,50,000
Revised CA as on 1/4/19 = 27,00,000
Remaining Life = 9 years
Revised Depreciation = 3,00,000 P.a.
Assuming entity opted to transfer partial revaluation surplus to GR equal to excess depreciation
i.e. 50,000 p.a.
On 31/3/21, PPE tested for impairment & Recoverable amount is 16,00,000
CA as on 31/3/21 = 21,00,000
Recoverable Amount = 16,00,000
Impairment Loss = 5,00,000
Setoff out of Revaluation Surplus = 3,50,000
Remaining Transfer to P&L = 1,50,000
Revised CA as on 31/3/21 = 16,00,000
Balance of Revaluation Surplus = Nil
Depreciation = 2,28,571 (P.A.) with useful life of 7 years
On 31/3/24, Indicators of Reversal of Impairment arise,
Recoverable Amount is:-
Case 1 = 11,00,000
12.17
INDAS 36
Case 2 = 15,00,000
Current CA (as on 31/3/24) = 9,14,286
Reversal (Case 1)
RA = 11,00,000
CA had there been no Impairment earlier = 27,00,000/9 X 4 = 12,00,000
Whichever is less; i.e. 11,00,000
CA of PPE should be increased to 11,00,000

Reversal of I/L = 1,85,714 (11,00,000 – 9,14,286)
What could be the revaluation surplus Balance had there been no impairment earlier
4,50,000/9 X 4 = 2,00,000
PPE A/c Dr. 1,85,714

To Revaluation Surplus 1,85,714
Reversal (Case 2)
Reversal amount = 15,00,000
CA had there been no Impairment earlier = 12,00,000
Whichever is lower i.e. CA shall be increased to ₹ 12,00,000

Reversal = 2,85,714
Revaluation Surplus = 2,00,000

Profit & Loss = 85,714
PPE A/c Dr. 2,85,714

To Revaluation Surplus 2,00,000
To P & L 85,714
Example 4:
Case 1: NCI as per Fair Value Method
Goodwill = 3,75,000
Carrying Amount of CGU = 15,00,000 (Assuming goodwill is fully allocable to this CGU)
Therefore; Total CA of CGU = 18,75,000
Recoverable Amount = 14,00,000
Therefore Impairment Loss = 4,75,000
Impairment loss allocated to Goodwill = 3,75,000

Impairment loss allocated to CGU = 1,00,000
12.18
INDAS 36
Journal Entry
(a) Impairment Loss A/c Dr. 4,75,000
To Goodwill A/c 3,75,000
To PPE A/c 1,00,000
(b) P&L of Parent A/c Dr. 3,32,500

NCI A/c Dr. 1,42,500
To Impairment Loss A/c 4,75,000
Case 2: NCI as per Proportion of Net Assets Method

Goodwill = 3,00,000
Carrying Amount of CGU = 15,00,000
Therefore; Total CA of CGU = 18,00,000 (Including goodwill) AS PER BOOKS
Total Recoverable Amount = 14,00,000
Carrying Amount of CGU (including Parent's Share of 3,00,000 in goodwill) = 18,00,000

(+) Notional Goodwill (share of NCI) = 1,28,571
Total CA of CGU including full goodwill (including Notional) = 19,28,571
(-) Goodwill = (4,28,571)
PPE Impairment = 1,00,000
Impairment Loss to be Recognised: -
Towards CGU = 1,00,000
Towards recognised goodwill = 3,00,000
= 4,00,000
NCI A/c Dr. 30,000

P & L A/c (Parent) Dr. 3,70,000
To Goodwill 3,00,000
To PPE 1,00,000
Case 3: NCI as per Proportion of Net Assets Method

Recoverable Asset = 16,00,000
CA (Including Notional) = 19,28,571
70% of above Impairment Loss belongs to Parent's share:

Impairment Loss (P&l) A/c Dr. 2,30,000
To Goodwill A/c 2,30,000
(30% of remaining loss belongs to NCI but not to be recognized)
12.19
INDAS 36
9. DISCLOSURES:
An entity is required to disclose the following for each class of assets:
(a) The amount of impairment losses recognised in profit or loss during the period and the line
item(s) of the statement of profit and loss in which those impairment losses are included;
(b) The amount of reversals of impairment losses recognised in profit or loss during the period
and the line item(s) of the statement of profit and loss in which those impairment losses are
reversed;
(c) The amount of impairment losses on revalued assets recognised in other comprehensive
income during the period; and
(d) The amount of reversals of impairment losses on revalued assets recognised in other
comprehensive income during the period.
If any portion of the goodwill acquired in a business combination during the period has not been
allocated to a cash-generating unit (group of units) at the end of the reporting period, the
amount of the unallocated goodwill shall be disclosed together with the reasons why that
amount remains unallocated.
12.20
INDAS 36
Example 5:
On March 31, 20X1, XYZ Ltd. makes following estimate of cash flows for one of its asset located in
USA:
Year Cash flows
20X1-20X2 US $ 80
20X1-20X3 US $ 100
20X1-20X4 US $ 20
Following information has been provided:
Particulars India USA
Applicable discount rate 15% 10%
Exchange rates are as follows:

As on Exchange rate
March 31, 20X1 Rs 45/US $
As on Expected Exchange rate
Calculate value in use as on March 31, 20X1.

SOLUTION
Year Cash flows Present value Discounted
(US $) factor @ 10% cashflows (US $)
20X1-20X2 80 0.9091 72.73
20X2-20X3 100 0.8264 82.64
20X3-20X4 20 0.7513 15.03
Total Discounted cash flows in US $ 170.40
Exchange rate as on March 31, 20X1, i.e., date of calculating value in
use ₹ 45/US $
Value in use as on March 31, 20X1 ₹ 7,668
Example 6:
Cash flow of ₹ 1,000 may be received in one year, two years or three years with probabilities of
10%, 60% and 30%, respectively. Calculate expected cash flows assuming applicable discount rate
of 5%, 5.25% and 5.5% in year 1, 2 and 3, respectively.
SOLUTION
Years Cash Flows PVF Present Probability Expected
Value Cash Flows
1 1000 0.95238 952.38 10% 95.24
2 1000 0.90273 902.73 60% 541.64
3 1000 0.85161 851.61 30% 255.48
Total 892.36
12.21
INDAS 36
The expected present value is ₹ 892.36.
Example 7:
Calculate expected cash flows in each of the following cases:
(a) the estimated amount falls somewhere between ₹ 50 and ₹ 250, but no amount in the range is
more likely than any other amount.
(b) the estimated amount falls somewhere between ₹ 50 and ₹ 250, and the most likely amount is ₹
100. However, the probabilities attached to each amount are unknown.
(c) the estimated amount will be ₹ 50 (10 per cent probability), ₹ 250 (30 per cent probability), or
₹ 100 (60 per cent probability).
SOLUTION
(a) the estimated expected cash flow is ₹ 150 [(50 + 250)/2].
(b) the estimated expected cash flow is ₹ 133.33 [(50 + 100 + 250)/3].
(c) the estimated expected cash flow is ₹ 140 [(50 × 0.10) + (250 × 0.30) + (100 × 0.60)].
Example 8:
A machine has suffered physical damage but is still working, although not as well as before it was
damaged. The machine's fair value less costs of disposal is less than its carrying amount. The
machine does not generate independent cash inflows. The smallest identifiable group of assets
that includes the machine and generates cash inflows that are largely independent of the cash
inflows from other assets is the production line to which the machine belongs. The recoverable
amount of the production line shows that the production line taken as a whole is not impaired.
Assumption 1: budgets/forecasts approved by management reflect no commitment of
management to replace the machine.
Assumption 2: budgets/forecasts approved by management reflect a commitment of management

to replace the machine and sell it in the near future. Cash flows from continuing use of the
machine until its disposal are estimated to be negligible.
How to account for the impairment loss of machine in above scenarios?
Solution
1. The recoverable amount of the machine alone cannot be estimated because the machine's value
in use:
a) may differ from its fair value less costs of disposal; and
b) can be determined only for the cash-generating unit to which the machine belongs (the
production line).
The production line is not impaired. Therefore, no impairment loss is recognised for the
machine. Nevertheless, the entity may need to reassess the depreciation period or the
depreciation method for the machine. Perhaps a shorter depreciation period or a faster
12.22
INDAS 36
depreciation method is required to reflect the expected remaining useful life of the
machine or the pattern in which economic benefits are expected to be consumed by the
entity.
2. The machine's value in use can be estimated to be close to its fair value less costs of disposal.
Therefore, the recoverable amount of the machine can be determined and no consideration is
given to the cash-generating unit to which the machine belongs (i.e. the production line).
Because the machine's fair value less costs of disposal is less than its carrying amount, an
impairment loss is recognised for the machine.
After the allocation procedures have been applied, a liability is recognised for any remaining
amount of an impairment loss for a cash-generating unit if, and only if, that is required by
another Indian Accounting Standard.
Example 9:
Goodwill had previously been allocated to cash-generating unit A. The goodwill allocated to A
cannot be identified or associated with an asset group at a level lower than A, except arbitrarily.
A is to be divided and integrated into three other cash-generating units, B, C and D. How the
goodwill should be reallocated to B, C and D?
Solution
Since goodwill allocated to A cannot be non-arbitrarily identified or associated with an asset
group at a level lower than A, it is reallocated to units B, C and D on the basis of the relative values
of the three portions of A before those portions are integrated with B, C and D.
Example 10:
Acute Ltd is the owner of a CGU (Cash Generating Unit) block of assets whose current carrying
cost is Rs. 999 lakhs. The company, after a detailed study by its technical team, has assessed the
present recoverable amount of this CGU block of assets at Rs. 555 lakhs. The value of the block
of assets as per the Income tax Records is Rs 777 lakhs. The Board of Directors of the company
have issued a signed statement confirming that the impairment in the value of the CGU is only a
temporary phenomenon which is reversible in subsequent periods and also assuring virtual
certainty of taxable incomes in the foreseeable future. You are required to show Deferred Tax
workings as per Accounting Standards in force, given the tax rate of 30% plus 10% surcharge
thereon. The depreciation rate for tax purposes is 15% and that per books is 13.91 %.
(ANSWER: DTL Reversed – 81.18 and DTA Created – 73.26)
Example 11:
Pacific Bio Ltd, a Singapore company, owns property in Kuala Lumpur. The property is held under
the INDAS 16 Revaluation Model and has a carrying amount of $10.9 million at 30 September
20X3.
On this date Pacific Bio conducted an impairment test on the property and found its value in use
12.23
INDAS 36
to be MYR23 million and its fair value less costs of disposal to be MYR21.5 million. The company
has previously recognised a revaluation surplus in respect of the property and the balance on the
revaluation surplus in equity is $1,656,750. How is the impairment accounted for as at 30
September 20X3? Exchange rate on 30 September 20X3: $1: 2.5MYR.
SOLUTION
The recoverable amount is MYR23 million, being the higher of value in use and fair value less
costs of disposal.
The recoverable amount is translated to $9.2 million, therefore an impairment loss of $1.7
million is recognised.
$1,656,750 reduces the revaluation surplus to nil and the balance of $43,250 is recognised in
profit or loss ($):
DEBIT Revaluation surplus (other comprehensive income) 1,656,750
DEBIT Profit or loss 43,250
CREDIT Property 1,700,000
To recognise the impairment loss on the revalued property.
12.24
INDAS 36
Student Notes:-
12.25
INDAS 36
Student Notes:-
12.26
INDAS 36
TOPIC 21
INDAS 33 - EARNINGS PER SHARE
Quote:
“The beautiful thing about learning is that
no one can take it away from you.”
Index
1 Presentation of EPS 21.2
2 Measurement of BEPS 21.3

3 Compulsory Convertible Debentures 21.8
/ Pref. Shares
4 Shares issued under Business Combination 21.9
5 Right Issue Effect on EPS 21.10
6 DILUTED EARNINGS PER SHARE 21.13

7 Entity with Discontinued Operations 21.19
INDAS 33
1. PRESENTATION OF EPS
This Ind AS shall apply to companies that have issued ordinary shares to which Ind AS notified
under the Companies Act apply.
When an entity presents both consolidated financial statements and separate financial statements
prepared in accordance with Ind AS 110, Consolidated Financial Statements, and Ind AS 27,
Separate Financial Statements, respectively, the disclosures required by this Standard shall be
presented both in the consolidated financial statements and separate financial statements.
The above mentioned provisions are given in short in the following table
Sr. No. Type of Financial statements Consolidated EPS Separate EPS

1 Consolidated Must disclose Don't disclose
2 Separate Don't disclose Must disclose
EPS should be presented in the following headings:

i) Basic EPS for continuing operation
ii) Basic EPS for Discontinuing Operation
iii) Basis EPS for Total Business
21.2
INDAS 33
2. MEASUREMENT OF BASIC EARNINGS PER SHARE
An entity shall calculate basic earnings per share for profit or loss attributable to ordinary equity
holders of the parent entity and, if presented, profit or loss from continuing operations
attributable to those equity holders.
Thus, one can note two important points from the above paragraph. Company is required to
calculate basic EPS for:
1. For equity shareholders
2. Of parent company
According to the appendix to the Ind AS 33, for the purpose of calculating earnings per share
based on the consolidated financial statements, profit or loss attributable to the parent entity
refers to profit or loss of the consolidated entity after adjusting for non-controlling interests.
Profit/Loss attributed to Equity share holders of Parent Entity

Weighted average number of Equity shares
2.1 NUMERATOR FOR BASIC EPS
1. Profit/Loss under Consolidated Financial Statements :

Profit/Loss attributable to equity holders of Parent co. (not considering earnings of Non-
Controlling interest)
2. Preference divided shall be deducted from PAT, in case there are cumulative preference shares
then dividend shall be deducted whether declared or not and in case of non-cumulative
preference share dividend shall be deducted only when it is declared. (Always assume cumulative
if not specified in question)
3. Premium paid or settlement premium on redemption/conversion on redemption of preference

shares and written off from security premium account or from other reserve shall also be
deducted from profit for the purpose of EPS.
4. Any Income or Expenses which is otherwise required to be transferred to Profit and Loss a/c
but not actually recognised in profit and loss a/c and transferred to other reserves or written
off from security premium (like Preliminary exp) shall also be considered while calculating EPS.
5. If preference shares are classified as Financial Liability under Amortised Cost Method (IndAS
109), then for the purpose of calculating Earnings attributable to Equity shareholders,
dividend/interest shall be deducted as per Effective Rate of Interest.
21.3
INDAS 33
Example 1:
P Ltd. has earnings of Rs 15,00,000, o/s equity shares 50000 no.
P Ltd. has one subsidiary co. S Ltd. (80% investment) whose earnings Rs. 5,00,000, Subsidiary has
total equity shares O/s 20000
Calculate BEPS of P Ltd. for Separate as well as Consolidated Financial Statements.
Ans: EPS 30 & 38
Example 2:
P Ltd. has earnings of Rs 15,00,000, o/s equity shares 50000 no.
P Ltd. has one subsidiary co. S Ltd. (80% investment) whose earnings Rs. 5,00,000, Subsidiary has
total equity shares O/s 20000. During the year S ltd. paid dividend Rs. 150000 to its shareholders.
Calculate BEPS of P Ltd. for Separate as well as Consolidated Financial Statements.
Ans: EPS 30 & 35.6
Example 3:
ABC Company issues 9% preference shares of FV of Rs 10 each on 1.4.20X1. Total value of the issue
is Rs 10,00,000. The shares are issued at a discount of Rs 0.50 each, for a period of 5 years and
would be redeemed at the end of 5th year. The shares are to be redeemed at Rs 11 each.
At the end of the year 3, i.e. on 31.3.20X4, company finds that it has earned good returns than
expected over last three years and can make the redemption of preference shares early. To
compensate the shareholders for two years of dividend which they need to forego, company
decided to redeem the shares at Rs 12 each instead of original agreement of Rs 11. Comment on the
earnings for the year 20X3-20X4.
Solution
In the given situation, Rs 2 per share is the excess payment made by the company amounting to Rs
2,00,000 in all. The amount of Rs 2,00,000 will be deducted from the earnings of the year 20X3-
20X4 while calculating the basic EPS of year 20X3-20X4.
2.2 DENOMINATOR FOR BASIC EPS

· For the purpose of calculating basic earnings per share, the number of ordinary shares shall be
the weighted average number of ordinary shares outstanding during the period.
· The weighted average number of ordinary shares outstanding during the period is the number of
ordinary shares outstanding at the beginning of the period, adjusted by the number of ordinary
shares bought back or issued during the period multiplied by a time-weighting factor.
· The time-weighting factor is the number of days that the shares are outstanding as a proportion
of the total number of days in the period; a reasonable approximation of the weighted average
is adequate in many circumstances.
21.4
INDAS 33
Example 4:
Following is the data for company XYZ in respect of number of equity shares during the financial
year 20X1-20X2. Find out the number of shares for the purpose of calculation of basic EPS as per
IndAS 33.
Sr. No. Date Particulars No of shares
1 1-Apr-20X1 Opening balance of outstanding equity shares 100,000
2 15-Jun-20X1 Issue of equity shares 75,000
3 8-Nov-20X1 Conversion of convertible pref shares in Equity 50,000
4 22-Feb-20X2 Buy back of shares (20,000)
5 31-Mar-20X2 Closing balance of outstanding equity shares 205,000
Solution
The closing balance of the outstanding shares is 2,05,000 by a normal addition and subtraction. But
as per weighted average concept, one need to find out for how many days each type of shares were
actually held during the year.
The shares which were there on 1st April 20X1, were held for the whole year. Therefore, weighted
average number of such shares will be given by the formula:
No of shares x no of days the shares were held during the year / 365
= 1,00,000 x 365 / 365 = 1,00,000
But the shares which were issued on 15th June 20X1, were held for only 290 days. Therefore, the
weighted average number of shares will be 75,000 x 290 / 365 = 59,589.
Following the above formula, the weighted number of shares for calculation of EPS for the year
20X1-20X2 will be as follows:
Sr. No. Date Particulars No of No of days Weighted
shares shares were average no of
outstanding shares
1 1-Apr-20X1 Opening balance of 100,000 365 100,000
outstanding equity shares
2 15-Jun-20X1 Issue of equity shares 75,000 290 59,589

3 8-Nov-20X1 Conversion of 50,000 144 19,726
convertible preference
shares in Equity
4 22-Feb-20X2 Buy back of shares (20,000) (38)* (2,082)
5 31-Mar-20X2 Closing balance of 205,000 177,233
outstanding equity s
hares
These shares had already been considered in the shares issued. The same has been deducted
assuming that the bought back shares have been extinguished immediately.
From the above illustration, one can notice that the date of issue/ conversion/ repurchase/
transaction affecting the addition or deletion in number of shares is very crucial for calculation of
weighted average number of shares.
21.5
INDAS 33
Deciding the date for issue of shares
· Shares are usually included in the weighted average number of shares from the date
consideration is receivable (which is generally the date of their issue), for example:
The abovementioned provisions are summarised in the following table:
Sr. No Nature of transaction Effective Date when

1 General Rule consideration is receivable
2 Exchange for cash Cash is receivable
3 Voluntary reinvestment of dividend Dividend are reinvested
4 Conversion of debt instrument Accrual of interest is stopped
5 In lieu of interest / principal Accrual of interest is stopped
6 Exchange of liability Settlement Date
7 Consideration for acquisition of asset Acquisition is recognised in books
8 Rendering of services Services are rendered
9 Business combinations Acquisition date
10 Mandatory convertible instrument Date of contract
11 Contingently issuable shares When all necessary conditions for
conversion are satisfied
· Ordinary shares issued as part of the consideration transferred in a business combination

are included in the weighted average number of shares from the acquisition date. This is
because the acquirer incorporates into its statement of profit and loss the acquiree's
profits and losses from that date.
· Contingently issuable shares are treated as outstanding and are included in the calculation of
basic earnings per share only from the date when all necessary conditions are satisfied (i.e. the
events have occurred).
· Shares that are issuable solely after the passage of time are not contingently issuable shares,
because the passage of time is a certainty.
· Outstanding ordinary shares that are contingently returnable (ie subject to recall) are not
treated as outstanding and are excluded from the calculation of basic earnings per share until
the date the shares are no longer subject to recall.
Example 5:
ABC company will issue the shares only if the company achieves the after tax profitability of 15%.
In such case, achievement of profitability is a contingent event. Therefore, company should not
include the number of shares in calculation of Basic EPS, unless company actually achieves 15%
profitability. In the F.Y. 20X0-20X1 company achieves the profitability of 13% only. The company
will not include the shares while calculating EPS. But if in 20X1-20X2, company achieves the
profitability of 17%. Then while calculating the EPS for 20X1-20X2 the shares will be considered
for the calculation of basic EPS even if the shares are actually not issued.
21.6
INDAS 33
Example 6:
PQR Company entered into contract that it will issue the shares only after completion of 3 years
from the date of contract. Here the condition to be satisfied is the completion of 3 years. There is
no other condition, then passage of time. Passage of time is definite event. There is no uncertainty
involved in passage of time. Therefore, such shares will be included in the calculation of basic EPS
because there is no contingently issued shares.
PARTLY PAID SHARE

Partly paid equity shares are treated as a fraction of an equity share to the
extent that they were entitled to participate in dividends.
Example 7:
Calculate Basic earnings per share for 10-11:-
Earnings attributable for Equity shareholders (10-11)- Rs. 10,00,000/-
Equity Shares opening Balance 1/4/2010: 16,500 shares of Rs. 10 each 7 paid up
Public Issue - 1/7/2010: 10,000 shares of Rs. 10 each 6 paid up
Received calls on 1/10/2010: 16,400 shares Rs. 3 per share
Received calls on 1/11/2010: 10,000 shares Rs. 4 per share
(Answer: EPS - 49.56)
2.3 BONUS ISSUE, SHARE SPLIT & SHARE CONSOLIDATION

Ordinary shares may be issued, or the number of ordinary shares outstanding may be reduced,
without a corresponding change in resources. Examples include:
a) A capitalisation or bonus issue (sometimes referred to as a stock dividend);

b) A bonus element in any other issue, for example a bonus element in a rights issue to existing
shareholders;
c) A share split; and
d) A reverse share split (consolidation of shares).
In above case where the number of shares changes without the change in the resources, the date
will be considered from the beginning of the earliest period presented, irrespective of the fact of
actual capitalisation of the reserves.
If there is no change in the resources then the date of change will not be relevant and opening
balance of the shares will be adjusted with the new number of shares. However, if the event is
going to result in change in the total amount of capital, i.e resources, then the effective date need
to be considered and accordingly the weighted number of shares need to be calculated.
21.7
INDAS 33
3. COMPULSORILY CONVERTIBLE DEBENTURES OR
PREFERENCE SHARES
Mandatory/Compulsorily Convertible instruments (convertible into Equity shares) are to be

considered while calculating Basic EPS i.e. no. of promised shares on conversion of those
instruments shall be considered in the calculation of Weighted Avg. no. of shares from the date of
contract i.e. from the date of issue of such instruments.
However interest paid on such instruments shall be treated in the normal way and deducted from
Net Profit and Loss attributable to ESH.
In the absence of any specific info, always assume that convertible instruments are not mandatory
but Optional. Optional Convertible Instruments are not considered in the calculation of Basic EPS
but to be considered in Diluted EPS.
Example 8:
O/s Equity shares as on 01.04.2018 – 1,00,000 no. of Rs. 10/-
Issued 9% Compulsorily convertible debentures on 01.07.2018 – 10000 No. (100/-) convertible
after 3 years in the ratio of 3:1
EBIT – 12,00,000
Tax Expenses 1,80,000
21.8
INDAS 33
4. SHARES ISSUED UNDER BUSINESS COMBINATION
Equity shares issued as part of the consideration under Business Combination (IndAS 103) shall be
considered from Acquisition date of business while calculating Weighted Avg. No. of Shares.
Acquisition date means the contract date i.e. the date on which Net Assets, NCI, Consideration and
Goodwill are first measured.
Example 9:
On June 30, 2001, B Limited merged into A Limited.
The following is the relevant information for the year ended 31st March 2002:
Particulars A Limited B Limited

Net profit (Rs.) Until Acquisition 5,00,000
After Acquisition to year end (March 31, 2002) 8,00,000 2,00,000
Number of shares (Rs. 10 each)
At the start of the year 6000
6000 4000
On the date of Acquisition
10000 4000
At the end (March 31, 2002)
(Ans: 144.44 under SFS & 166.667 under CFS)
Example 10:
Calculate BEPS of A Ltd. from the following information:
Earnings attributable to Equity Shareholders for the year 2004-05 = Rs.10,00,000
Earnings attributable to Equity Shareholders for the year 2005-06 = Rs. 12,00,000
Equity shares of A Ltd. as on 1-4-04 =10,000 shares of FV of Rs. 10
On 1-10-05 A Ltd. issued 10,000 shares as Purchase consideration for acquisition of Business of
B Ltd. Earnings of B Ltd. for the year 2005-06 till 01.10.2005 are Rs. 3,60,000
(Ans.: 04-05 = Rs. 100 and 05-06 = Rs. 80)
21.9
INDAS 33
5. RIGHT ISSUE OF SHARES
A rights issue usually includes a bonus element.
Treatment of Right Shares:
Following steps are applied
Step 1: Calculate TMP[ER] if not available. Such price is IV of shares
Formula
[Fair Value (before right) x No. of share (pre-right)] + Right issue proceeds
Total shares post right
Step 2: Calculate paid-up part in Right issue
Paid – up Part = Profit Proceeds
Market Price as per Step1
Step 3: Calculate Bonus part in Right
Bonus * Right Share - paid part as per Step 2
Step 4:® Paid part should be adjusted from the date of receipts of amount.® Bonus part
should be considered price beginning® Previous Year EPS will be readjusted because of Bonus
elements.
Example 11:
X Co. Ltd. supplied the following information. You are required to compute the Basic EPS.
(Accounting year 1.1.2002 - 31.12.2002)
Net Profit for the accounting years 2002 and 2003 is Rs. 20,00,000 and Rs.30,00,000
No. of shares outstanding prior to Right Issue 10,00,000 shares
Rights Issue: One new share for every 4 Shares outstanding i.e., 2,50,000 shares
Right Issue Price: Rs. 20. Last date for exercise of rights is 31.3.2003
Fair Rate of one Equity Share immediately prior to exercise of right on 31.3.03 - Rs. 25
(Answer: Basic EPS for the current year Rs. 30,00,000 ¸ 11,97,917 = Rs. 2.50.
EPS for the previous year as originally reported Rs. 20,00,000 ¸10,00,000 = Rs. 2.00, Adjusted EPS
for the previous reporting period Rs.20,00,000 ¸(10,00.000×1.042) =Rs. 1.92
Example 12:
At 31 December 20X1, the issued share capital of a company consisted of 1.8 million ordinary
shares of Rs. 10 each, fully paid. The profits for the year ended 31 December 20X1 and 20X2
amounted to Rs. 630,000 and Rs. 875,000 respectively. On 31 March 20X2, the company made a
rights issue on a 1 for 4 basis at Rs. 30. The market price of the shares immediately before the
rights issue was Rs. 60. Calculate EPS.
Solution
Calculation of theoretical ex rights price:
21.10
INDAS 33
Number of shares Rs.
Initial holding 4 Market Value (4 x 60) 240
Rights taken up 1 Cost (1 x 30) 30
New holding 5 Theoretical price 270
Theoretical ex rights price = 270/5 = Rs. 54
Calculation of bonus element

The bonus element of the rights issue is given by the fraction:
Market price before rights issue/Theoretical ex-rights price = 60 / 54 = 10/9
This corresponds to a bonus issue of 1 for 9. The bonus ratio will usually be greater than 1 (that is,
the market price of the shares immediately prior to the exercise of rights is greater than the
theoretical ex-rights price). If the ratio is less than 1, it might indicate that the market price has
fallen significantly during the rights period, which was not anticipated when the rights issue was
announced. In this situation, the rights issue should be treated as an issue of shares for cash at full
market price.
It can be demonstrated, using the figures in the illustration, that a rights issue of 1 for 4 at Rs. 30
is equivalent to a bonus issue of 1 for 9 combined with an issue of shares at full market price of Rs.
54 per share. Consider an individual shareholder holding 180 shares:
Number of shares Value Rs. (in

(in '000s) million)
Original holding 1,800 Value at Rs.60 per share 108.00
Rights shares (1:4) 450 Value at Rs.30 per share 13.50
Holding after right issue 2,250 Value at Rs.54 per share 121.50
The additional 450 thousand rights shares at Rs. 30 can be shown to be equivalent to a bonus issue
of 1 for 9 on the original holding, followed by an issue of 1:8 at full market price of Rs. 54 following
the bonus issue, as follows:
Number of shares Value Rs. (in
(in '000s) million)
Original holding 1,800 Value at Rs.60 per share 108.00
Bonus issue of 1 for 9 200 Value Nil Nil
2000 Value at Rs. 54 per share 108.00

Issue of 1 for 8 at full price 250 Value at Rs. 54 per share 13.50
(450-200)
Total holding 2250 Value at Rs.54 per share 121.50
21.11
INDAS 33
The shareholder is therefore indifferent as to whether the entity makes a rights issue of 1 for 4 at
Rs. 30 per share, or a combination of a bonus issue of 1 for 9 followed by a rights issue of 1 for 8 at
full market price of Rs. 54 per share.
Having calculated the bonus ratio, the ratio should be applied to adjust the number of shares in
issue before the rights issue, both for the current year and for the previous year. Therefore, the
weighted average number of shares in issue for the current and the previous period, adjusted for
the bonus element, would be:
Weighted average number of shares:

20X2 20X1
No of actual shares in issue before rights 1,800,000 1,800,000
Correction for bonus issue (1:9) 200,000 200,000
Deemed no of shares in issue before right issue 2,000,000 2,000,000
(1.8 million x 10/9 for the whole year)
The no of shares after the rights issue would be
= 1.8 million x 5/4 = 2,250,000
Therefore, the weighted average number of shares would be
2.0 million for the whole year 2,000,000
1.8 million x 10/9 x 3/12 (before rights issue) 500,000 -
2.25 million x 9/12 (after rights issue) 1,687,500 -
Weighted average number 2,187,500 2,000,000
20X2 20X1
Calculation of earnings (as previously stated)
Profits for the year Rs. 875,000 Rs. 630,000
Weighted average number 2,187,500 1,800,000
Basic EPS 40p 35p
Basic EPS for 20X1 (as restated) = 31.50p
Rs. 630,000 / 2,000,000
In practice, the restated EPS for 20X1can also be calculated by adjusting the EPS figure of the
previous year by the reciprocal of the bonus element factor:
* 35p x 9/10 = 31.50 p
21.12
INDAS 33
6. DILUTED EARNINGS PER SHARE
1. Dilution is a reduction in earnings per share or an increase in loss per share resulting from the
assumption that convertible instruments are converted, that options or warrants are
exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.
2. Anti-dilution is an increase in earnings per share or a reduction in loss per share resulting from
the assumption that convertible instruments are converted, that options or warrants are
exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.
3. A potential equity share is financial instrument of other contract that entitles, or may entitle,
its holder to convert its holding in to equity shares.
Examples of potential equity shares are:

· Debt instruments or preference shares, that are convertible into equity shares,
· Share warrants;
· Options including employee stock option plans under which employees of an enterprise are
entitled to receive equity shares as part of their remuneration and other similar plans.
· Shares that would be issued upon the satisfaction of conditions resulting from contractual
arrangements, such as the purchase of a business or other assets.
· Share application money pending allotment if used in the business.
· Partly paid Equity shares to the extent of unpaid amount (not entitled for Dividend)
For the purpose of calculating diluted earnings per share, the net profit or loss for the period
attributable to shareholders and the weighted average number of shares outstanding during
period should be adjusted for the effect of all dilutive potential equity shares.
6.1 DILUTIVE OR NON DILUTIVE

Potential equity shares should be treated as dilutive when, and only when their conversion to equity
shares would decrease net profit per share from continuing ordinary operations.
Note 1: An enterprise uses net profit from continuing ordinary activities as "the control figure"
that is used to establish whether potential equity shares are dilutive or anti-dilutive.
The net profit from continuing ordinary activities is the net profit from ordinary activities after
deducting preference dividends and any attributable tax thereto and after excluding items
relating to discontinued operations.
Note 2: Potential equity shares are anti-dilutive when their conversion to equity shares would
increase earnings per share from continuing ordinary activities or decrease loss per share from
continuing ordinary activities.
The formula can be mathematically expressed as follows:
Profit/Loss attributed to Equity share holder when dilutive potential shares are converted into ordinary shares
Weighted average number of equity shares + Weighted average number of dilutive potential ordinary shares
21.13
INDAS 33
How to Calculated DEPS – Following calculation is required:
1. Identify Potential Equity Shares first. (Whether any security which is pending
for conversion is outstanding and resources thereof have been used in the
business)
2. Identify Dilutive potential equity shares by applying following steps:
Step 1 - Calculate Incremental EPS for every single potential equity share
Step 2 - Arrange IEPS in Increasing Order
Step 3 - Apply Test for Dilution. Test each potential equity share on BEPS from continuing
ordinary operations. If ratio EPS declines from preceding calculation then it is called
Diluted EPS and if ratio increases from previous calculation then it is called Anti – Diluted
EPS
Why we are following above steps:

To maximise the dilution of basic earnings per share, each issue or series of potential
ordinary shares is considered in sequence from the most dilutive to the least dilutive, ie
dilutive potential ordinary shares with the lowest 'earnings per incremental share' are
included in the diluted earnings per share calculation before those with a higher earnings
per incremental share. Options and warrants are generally included first because they do
not affect the numerator of the calculation.
Note: Anti Diluted EPS shall not be presented in the Statement of P&L, in that case Diluted
EPS shall be equal to BEPS
21.14
INDAS 33
6.2 CALL OPTIONS ISSUED/WRITTEN BY ENTITY
1. Call options (Potential Equity Shares) shall be considered for the calculation of DEPS only when
they are “in the money option” i.e. dilutive (when exercise price offered is lower than Market
price of the share.
2. Call options (“Out of Money) are to be ignored while calculating DEPS. Out of money option
means the option is not in favour of holder.
3. Potential Equity Shares are calculated as under:
Total No. of Options Less Expected proceeds from options/Avg MP of share
Example 13:
If company issues 100 options to be exercised at Rs 45 each after 31st March 20X1. The market
value of the share on 15th April 20X1 is Rs 50 each. In such cases the holder option will be
interested in exercising the option because he will get the shares at Rs 45, when the market value
outside is Rs 50. He can sell the shares outside and get a profit of Rs 5 each on each share held, i.e.
100 x Rs 5 = Rs 500.
On the other hand, assume that the market value of 15th April 20X1 is Rs 35 only. In such case the
holder of option / warrant will not be interested in exercising the option because it will be a loss
making proposal for him.
In first case where the strike price of call option is less than the market value of the share it is
termed as “in the money” option whereas in second case when exercise price of call option is more
than the market value of the share it is termed as “out of the money: option.
While calculating the diluted EPS, the options / warrants need to be considered only if they are
dilutive.
21.15
INDAS 33
6.3 CONTINGENTLY ISSUABLE SHARES
v A contingent share agreement is an agreement to issue shares that is dependent on the

satisfaction of specified conditions.
v Contingently issuable ordinary shares are ordinary shares issuable for little or no cash or
other consideration upon the satisfaction of specified conditions in a contingent share
agreement.
v As in the calculation of basic earnings per share, contingently issuable ordinary shares are
treated as outstanding and included in the calculation of diluted earnings per share if the
conditions are satisfied (i.e. the events have occurred).
From which date these are to be considered for the calculation of weighted avg number of
shares –
From the date of satisfaction of condition
If condition is satisfied but shares are still not issued actually – to be considered in Basic EPS
and DEPS.
If conditions are satisfied at Balance sheet date but the final compliance date of condition is
in future – Treat potential equity and include in DEPS only.
If condition is satisfied and shares are also issued – to be considered in BEPS only.
v The main point to be kept in mind for the contingently issued shares is the word, contingent.
Contingency involves some amount of uncertainty. It depends on happening or not happening
of a particular event. Once all the conditions which were earlier uncertain, become certain
or satisfied, one can include the contingently issued shares in the calculation of Basic as well
diluted EPS.
Example 14:
ABC Company has issued contingently issuable shares on 1st January 20X1. The condition to be
satisfied is the average turnover of the company for last three quarters must exceed Rs. 100
million. If the condition is satisfied the company will issue the shares within a period of 6 months.
The conditions will be effective from the quarter ending 31st March 20X1. Company achieves the
said target on ending 31st December 20X1.
Explain what will be the status of shares while calculating diluted EPS?
Solution
In the above case, company will calculate its average turnover for last 3 quarter, every quarter
starting from 31st March 20X1.
Average of 3 quarters ending 31st March 20X1 – Not achieved – Therefore shares will not be
21.16
INDAS 33
included in Basic as well as Diluted for the year 20X0-20X1
Average of 3 quarters ending 30th June 20X1, September 20X1 – Target not achieved therefore
shares will not be considered for calculation of Basic as well as Diluted.
Average of 3 quarters ending on 31st of December 20X2 – Targeted turnover is achieved. Thus
the contingent condition which was needed to be satisfied for, is satisfied. Therefore, the
shares will be considered for calculation of Basic and diluted EPS for the 20X1-20X2. The date
that would be considered for calculation of weighted average number of shares will be 31st
December 20X1. The shares can be issued at any time during 6 months period. Therefore,
shares can be issued at any moment of time from the 1st January 20X2 to 30th June 20X2. In this
case, for calculation of weighted average number of shares for years 20X1-20X2, the period
that will be considered would be 1st January 20X2 to 31st March 20X2. For 20X2-20X3 the
period will start from 1st April 20X2. After 30th June 20X2, all the share will become ordinary
shares (those actually issued) and there will not be any shares for diluted as the date of
agreement is over, contingent condition is met.
If attainment or maintenance of a specified amount of earnings for a period is the condition for
contingent issue and if that amount has been attained at the end of the reporting period but
must be maintained beyond the end of the reporting period for an additional period, then the
additional ordinary shares are treated as outstanding, if the effect is dilutive, when calculating
diluted earnings per share. In that case, the calculation of diluted earnings per share is based on
the number of ordinary shares that would be issued if the amount of earnings at the end of the
reporting period were the amount of earnings at the end of the contingency period. Because
earnings may change in a future period, the calculation of basic earnings per share does not
include such contingently issuable ordinary shares until the end of the contingency period
because not all necessary conditions have been satisfied.
21.17
INDAS 33
6.4 EMPLOYEE STOCK OPTIONS
v Employee share options with fixed or determinable terms and non-vested ordinary shares are
treated as options in the calculation of diluted earnings per share, even though they may be
contingent on vesting. They are treated as outstanding on the grant date. Performance-based
employee share options are treated as contingently issuable shares because their issue is
contingent upon satisfying specified conditions in addition to the passage of time.
v Employee stock option have two categories. Some ESOPs will be time bound. It means the
employees will be getting the shares in lieu of the ESOPs, at the expiry of certain period. The
objective behind such stock options is to retain the employee with the company for a longer
period. As passage of time is not the contingent event, they will be considered while calculating
the diluted EPS.
v Another type of ESOPs will be performance based. Under this type of ESOPs, the employee is
entitled to ESOPs only when the desired level of performance is achieved by the company. The
issue of shares is not based on the time but is based on the performance. Performance target
can be in terms of turnover, profits, profitability, market capitalisation etc. In this case the
basic objective is to encourage the employees to put their best efforts so that company can
achieve its targets in the best possible time. The achievement of performance is a contingent
event. It may happen or may not happen. Therefore, such kind of ESOPs will be treated as
contingently issuable shares.
DILUTIVE EFFECT ON ESOP:

In case of Vested ESOPs, potential equity shares will be calculated as under:
Total ESOP – {Exer. Price x No. of Option / Avg. Fair Value}
21.18
INDAS 33
7. ENTITY WITH DISCONTINUED OPERATIONS
An entity that reports a discontinued operation should use income from continuing operations,
adjusted for preferred dividends and similar adjustments, if any, as the “control number” in
determining whether potential common shares are dilutive. That is, the same number of potential
common shares used in computing the diluted per-share amount of income from continuing
operations should be used in computing all other reported diluted per-share amounts even if the
effect will be anti-dilutive compared to their respective basic per-share amounts.
Entity with Discontinued Operations
While Calculating DEPS in Case of those

Entities with Discontinued Operations,
always Check F In Continuing operations,
is there an Income or Loss?
If there is Income from

Continuing Operations If there is a Loss from
Continuing Operation.
= Consider all Potential shares to

calculate DEPS of Overall Operation = EPS from Continuing Operation
(Continuing + Dis-continuing) even will get Anti-diluted
though there is an Anti-dilution (this is possible because of
Potential shares in Denominator)
= This is because the EPS of Continuing
Operation gets diluted & Income from = Therefore, DEPS will be Calculated
Contunuing Operations is Control without Considering
number i.e Point of decision. Potential Eq. shares.
21.19
INDAS 33
Student Notes:-
21.20
INDAS 33
TOPIC 20
INDAS 21 - THE EFFECTS OF CHANGES IN
FOREIGN EXCHANGE RATES
Quote: “You Learn More from Failure than Success”
Index
1. Scope 20. 2
2. Exclusions 20. 2
3. Key Definitions 20. 2
4. Functional Currency 20. 3
5. Case Studies of Functional Currency & Covid-19 Impact 20. 5
6. Monetary v/s Non-Monetary Items 20. 8
7. Brief Approach under INDAS 21 20. 8
8. Foreign Currency Transactions 20. 9
9. Changes in Functional Currency 20. 13
10. Foreign Currency Financial Statements 20. 14
11. Translation of Financial Items of Foreign Operations 20. 16
12. Disposal of Foreign Operation 20. 18
13. Tax Effects of ICAI Module 20. 19
INDAS 21
(1) SCOPE
• Accounting for transactions and balances in foreign currencies
• Translation of results and financial position of foreign operations
• Translation of financial statements into a presentation currency
(2) EXCLUSIONS
• Derivative transactions and balances that are within the scope of Ind AS 109 (Financial
Instruments: Recognition and Measurement). However, this standard applies to
translation of derivatives from functional currency to presentation currency.
• Hedge Accounting for foreign currency items, including net investment in foreign
operation – Covered by IndAS 109
• Presentation in statement of cash flows of transactions in a foreign currency or of a
foreign operation (IndAS 7 Statement of Cash Flows)
• Long Term Foreign Currency (LTFC) items for which an entity has opted for the
exemption as per IndAS 101. Such an entity may continue to apply the accounting policy as
opted for such long term foreign currency monetary items.
(3) KEY DEFINITIONS

Foreign Currency Functional Currency Presentation Foreign Operation
Currency
is a currency other is the currency of is the currency in is an entity that is a
than the Functional the primary which Financial subsidiary, associate,
Currency of the economic Statements are joint venture or
entity. environment in which presented. branch of a reporting
the entity operates. entity, the activities
(It can be more than Presentation currency of which are based or
one) In this regard, the may be different
conducted in a
primary economic from entity's
Functional Currency. country or currency
environment will
normally be the one in other than those of
which entity primarily (It may be more than the reporting entity.
generates and one)
expends cash i.e. it
operates.
20.2
INDAS 21
(4) FUNCTIONAL CURRENCY
Functional currency is the currency of the primary economic environment in which the entity
operates.
To determine Functional Currency, Entity should emphasis the currency that determines the
pricing of the transactions that it undertakes, rather than focusing on the currency in which
those transactions are denominated.
4.1 PRIMARY ECONOMIC ENVIRONMENT

In Which The Entity Primarily Generates And Expends Cash
Primary Indicators Other Indicators
Currency that mainly Currency that mainly Currency in which Currency in which
influence SALE influence COST – FUNDS FROM RECEIPTS FROM
PRICE of goods and Labour, Material and FINANCING OPERATING
services and other Cost. ACTIVITIES are ACTIVITIES are
Currency of the generated. retained.
country whose
competitive forces
and regulations
determine the sale
prices of its goods
and services.
Student Note:
20.3
INDAS 21
4.2 FUNCTIONAL CURRENCY OF FOREIGN OPERATION
Functional Currency is same as that Functional Currency may be different
of Reporting Entity's Currency that of Reporting Entity's Currency
Whether the activities of foreign When the activities are carried out with
operations are carried out as an a significant degree of autonomy and
extension of that reporting entity, independently from reporting entity.
rather than being carried out with a
significant degree of autonomy. For Example: when the foreign
operation accumulates cash and other
monetary items, incurs expenses,
For Example: If the foreign operation
generates income and arranges
only sells goods imported from the
borrowings, all substantially in its local
reporting entity and remits the
currency.
proceeds to it.
In practice, the functional currency of a

foreign operation that is integral to the
group will usually be the same as that of
the parent.
4.3 CHOICE OF FUNCTIONAL CURRENCY
1. An entity does not have a free choice of functional currency

2. An entity cannot change functional currency unless facts and circumstances
relevant to its determination are change.
20.4
INDAS 21
(5) CASE STUDIES ON FUNCTIONAL CURRENCY
CASE STUDY -1
1. M Ltd., a subsidiary in India, purchases goods from A Inc., its holding company in
USA.
2. Purchases are done in USD and are based on prices in the US Market
3. It sells goods in USD and the sale price is influenced by the holding company.
4. Other expenses are incurred locally.
5. M Ltd. has an External Commercial Borrowing from AInc. For financing its activities.
Solutions:
Factors (M Ltd.) Influenced by which Currency
Sales USD
Sales Market Influenced by USD
Expenses INR
Purchases USD
Financing USD
Cash flows USD/INR
Functional Currency USD
(Based on Above)
The above conclusions are based on Primary indicators
CASE STUDY 2
1. N Ltd., a subsidiary in India, purchases goods from A Inc., its holding company in
USA.
2. Purchases are done in USD and are based on prices in US Market.
3. It sells goods in INR but the sale price is influenced by the country of the holding
company.
5. N Ltd. has an External Commercial Borrowing from A Inc. for financing its activities.
Solution:
Factors (N Ltd.) Influenced by which Currency
Sales INR
Sales Market Influenced by USD
Expenses INR
Purchases USD
Financing USD
Cash flows USD/INR
Functional Currency USD
(Based on Above)
20.5
INDAS 21
CASE STUDY 3
1. USA Ltd (U) owns a subsidiary in India, Dragon Ltd (D).
2. D assembles all goods in India using a combination of locally sourced materials and
materials manufactured by U.
3. All goods are then exported and sold in Australia, based on selling prices determined by
U and influenced by Indian market.
4. The company has a loan from an Indian Bank.
Solution:
Factors (Dragon Ltd.) Influenced by which Currency
Sales AUD
Sales Market Influenced by INR
Expenses INR
Purchases INR/USD
Financing INR
Cash flows USD/INR/AUD
Functional Currency INR
(Based on Above)
CASE STUDY 4
1. X Ltd., a subsidiary in India, purchases goods from A Inc., its holding company in USA.
2. Purchases are done in USD and are based on prices in US Market.
3. It sells goods in INR and the sale price is market determined.
5. It remits its proceeds to the holding company.
Solution:
• Sales are in INR and are market determined whereas goods are purchased from USA.
• The primary indicators do not give a clear picture.
• On the basis of additional factors, in the given case X Ltd. is carrying out its activities
as an extension of holding company's foreign operations since it only sells goods
imported from the reporting entity and remits its proceeds to it, its functional currency
should be USD.
20.6
INDAS 21
COVID-19 IMPACT
The foreign exchange translation differences relating to foreign currency borrowings can not
be deferred and recognized over the balance period of the foreign currency borrowings if
there is covid 19 outbreak which has led to significant volatility in the financial markets due to
depreciation of Indian Rupee. Also it is not an exceptional item.
As per IndAS 21, Exchange Gains/Losses due to Change in Foreign Currency are always
Transfer to P&L immediately.
Not Allowed to defer in subsequent years.
20.7
INDAS 21
(6) MONETARY vs. NON-MONETARY ITEMS
Monetary items Non-Monetary item
Units of currency held and assets and liabilities There is no fixed or determinable number of
to be received or paid are in a fixed or units of currency
determinable number of units of currency.
Most debt securities are considered as

monetary items because their contractual cash
flows are fixed or determinable
Ø Examples of Monetary items include:

v Pensions and other employee benefits to be paid in cash;
v Provisions that are to be settled in cash;
v Cash dividends that are recognized as a liability;
v Contract to receive (or deliver) a variable number of the entity's own equity instruments
or a variable amount of assets in which the fair value* to be received (or delivered)
equals a fixed or determinable number of units of currency.
Ø Examples of Non-Monetary items include:

v Amounts prepaid for goods and services (e.g., prepaid rent) and income received in
advance, on the basis that no money will be paid or received in the future;
v Goodwill;
v Intangible assets;
v Inventories;
v Property, plant and equipment;
v Provisions that are to be settled by the delivery of a non-monetary asset.
(7) BRIEF APPROACH UNDER INDAS 21

Transaction in Foreign Translate that transaction into
Ok No problem, Translate ur
Currency? Functional Currency initially and on
Entire Balance sheet and Profit
every BS date make subsequent
& Loss items from Functional
recognition
Currency to Presentation
Yes
Currency.
Now, is ur Presentation Currency
different from Functional Currency?
done
Yes
Happy J
20.8
INDAS 21
(8) FOREIGN CURRENCY TRANSACTIONS
Steps to account and report for foreign currency transactions:
• Determine the functional currency of all reporting entities as explained above i.e.
Standalone Entity, An entity with Foreign Operation (Parent) or Foreign Operation
(Subsidiary or Branch).
• Translate the foreign transactions/items into its functional currency.
• Record and report the effect of such translation
8.1 INITIAL RECOGNITION

• Recognise transaction at the SPOT RATE i.e. the Exchange rate prevailing on
transaction date.
• May use e.g. Average rate for week or month as a practical approximation.
• Average rate may not be reliable if currency fluctuates significantly.
8.2 SUBSEQUENT MEASUREMENT:

Financial Statement Items Exchange Rates
Monetary Items Exchange Rate at the Reporting Date
(i.e. Closing Rate)
Non-Monetary items recognised at These items are not restated or
historical cost translated; instead they remain at the
Exchange Rate at the date of transaction
Non-monetary items measured at Fair Exchange Rate at the date when Fair
Value. valuation was determined.
(Eg. PPE accounted under Revaluation
Model, Inventory measured as NRV) Example: the cost or carrying amount, as
appropriate, is translated at the exchange
rate at the date when that amount was
determined; and the net realizable value or
recoverable amount, as appropriate, is
translated at the exchange rate at the date
when that value was determined.
WHAT WHAT RATE HOW to present DIFFERENCES
Monetary items => Closing rate In profit or loss

Non-monetary item at historical cost => Historical rate
Non-monetary item at fair value => Rate at the date
when FV was measared ] Except for
Net investment in the foreign operation
P/L OCI
20.9
INDAS 21
8.3 TREATMENT OF EXCHANGE DIFFERENCE ON TRANSLATION
OF FOREIGN CURRENCY TO FUNCTIONAL CURRENCY:
Non-monetary
LTFCMI – if
items which are Net Investment in Option is
General Rule measured at fair Foreign Operation availed under
value other than
IndAS 101
cost through OCI
Exchange difference Exchange difference Foreign exchange Option to recognize
is transferred to to be transferred to difference arises and accumulate ED
Profit and loss OCI from monetary item arising on
account in case of that forms part of restatement of
FCMI& Non-Monetary Example – net investment in LTFCMI directly in
Items measured at Revaluation Surplus foreign operation. separate component
other than Cost. under INDAS 16 In CFS, such of equity (FCMIT
Equity Instruments exchange Difference A/c) or
Eg. of FCMI – measured at FV thru differences are directly in
Receivables or OCI recognised in OCI Depreciable Asset.
Payables in Foreign and accumulated in
Currency. Equity.
To be reclassified
Eg. of Non Monetary from Equity to P&L
Items measured at on disposal of the
other than Cost are investment.
• Inventories
(Cost or NRV)
• Equity
Instruments
(FVTPL)
Example 1
A foreign currency asset amounting to Euro 200,000 is recorded at the date of purchase when
the exchange rate was 52 at 104 lacs.
The recoverable amount of the asset on the reporting date is calculated as Euro 175,000. The
exchange rate on the date of valuation was 60 to a Euro.
The carrying value of the foreign currency asset will be determined based on the recoverable
amount of the asset converted into functional currency at the exchange rate on valuation date
which is 105 lacs.
The impairment loss of Euro 25,000 in foreign currency is not recognised.
20.10
INDAS 21
Example 2 :
1. Company Apple's Functional currency is INR
2. On 01.01.2017 company buys a building for US $100,000
3. The exchange rate is INR54.48 per US $
4. Company Apple's year end, 31stMarch
5. The building is not depreciated as it is not yet available for use
6. On 31.03.2017 the exchange rate is INR 55.54 per US $ and the value of building is US
$110,000
Solution Initial Recognition
• On 01.01.2017 the building is capitalized at the rate at the transaction date
Building Dr. 54,48,000
To Bank Cr. 54,48,000
Subsequent Recognition:
• If cost model adopted as accounting policy under IndAS 16 for PPE, Building is carried at
its historical cost, hence no adjustment to be made
• If revaluation model adopted as accounting policy under IndAS 16 for PPE, value of building
to be adjusted for revised value.
• Hence the building being a non-monetary item and held at fair value, is to be translated at
the date of valuation
Building Dr. 661,400
To Revaluation Reserve Cr. 661,400
Revaluation reserve includes exchange component ($ 100000 * (55.54-54.48)) + ($ 10000
*55.54)
8.4 NET INVESTMENT IN A FOREIGN OPERATION

Meaning: If an entity is having monetary item that is receivable from or payable to a foreign
operation (say foreign subsidiary) for which settlement is neither planned nor likely to occur in
foreseeable future.
Such monetary items may include long-term receivables or loans but do not include trade
receivables or trade payables.
Example 3: An entity has two subsidiaries A and B. Subsidiary B is a foreign operation.

Subsidiary A grants a loan to Sub. B. Sub. A's loan receivable from Sub B would be part of the
entity's net investment in Sub. B if settlement of the loan is neither planned not likely to occur
in the foreseeable future.
Treatment of Exchange difference: Exchange difference arising on a monetary item that

form part of a reporting entity's net investment in a foreign operation shall be treated in the
following manner:
20.11
INDAS 21
SEPARATE FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS
OF REPORTING ENTITY (i.e. foreign entity) OF REPORTING ENTITY (i.e. parent entity)
Exchange difference shall be recognized in Exchange difference shall be recognized initially

the Profit and loss A/c. in Other Comprehensive Income (OCI) and
reclassified from equity to Profit and Loss A/c
on disposal of the Net Investment.
However, an investment in a foreign operation made by an associate of the reporting entity is not
part of the reporting entity's net investment in that operation because an associate is not a
group entity.
Example 4 :
(From IFRS Book)
An Entity A has a foreign subsidiary B whose functional currency is Euro (B). The Functional
Currency of the entity A is Dollar. On 1st Jan, 2016 when the exchange rate was $1= 1.5 Euro,
Entity A has given loan to subsidiary Bof $ 3 Million. On 31st December, 2016 the loan has not
been repaid and is regarded as a part of net investment in the foreign subsidiary, as
settlement of the loan is neither planned nor likely to occur in the foreseeable future. The
exchange rate on 31st Dec, 2016 is $1 = 2 Euro and the average rate for the year was $1 = 1.75
Euro. How this loan would be treated in the entity A's and group financial statement?
Solution
There is no exchange difference in the entity A's financial statements, as the loan has been
made in dollars. In the foreign subsidiary's financial statements, the loan is translated into its
own functional currency (Euro) at the rate of $1 = 1.5 Euro or 4.5 million Euro as of 1st Jan,
2016. At the year-end 31st Dec, 2016, the closing rate will be used to translate this loan. This
will result in the loan being restated at 6 million Euro ($3 million x 2), giving an exchange loss of
1.5 million Euro, which will be shown in the subsidiary's (B) Profit and Loss account.
In the group financial statements, this exchange loss will be translated at the average rate, as
it is in the subsidiary's Profit and Loss account item, giving loss of $8,57,000 (Euro 1.5 million
/ 1.75). This will be recognised in the equity.
20.12
INDAS 21
(9) CHANGE IN FUNCTIONAL CURRENCY
1. Only if there is a change to the underlying transactions, events and conditions (ie. Change in
Primary economic environment in which entity operates)
2. Translation procedures should be applied to the new functional currency prospectively
from the date of the change.
i. All items (Assets, Liabilities, Equity, and Expenses& Incomes) are translated into the
new functional currency using the exchange rate at the date of change.
ii. Resulting translated amounts for non-monetary items are treated as their historical
costs.
iii. Exchange differences arising from the translation of a foreign operation previously
recognised in other comprehensive income are not reclassified from equity to profit or
loss until the disposal of the operation.
iv. Exchange gain or loss from long-term monetary items accumulated in equity (where such
option is exercised) are not transferred to profit or loss immediately on change of the
entity's functional currency
Example 5
A, located in Germany, is a wholly owned subsidiary of Z. $ is Z's functional currency. € is A's
functional currency as all sales, purchases and labour costs were in €. Z started using A's facility
to meet its orders. A closed down its sales department as 80% of its supplies would be to Z. Z
built a new facility to produce materials required in its manufacturing process and A started
receiving all material from Z. A now expects cash inflows and outflows, except for wages in $.
The currency of revenues has changed from € to $. It seems to be permanent as the sales dept.
has been closed. Currency of outflows has changed from € to $. Position of A within Z's overall
operating strategy has changed from self-supporting, standalone entity to a manufacturing
facility of Z. There will be a change in the functional currency from € to $.
CHANGE IN PRESENTATION CURRENCY:

Since entities prefer to present financial statements in their functional currency, a change in
functional currency may be accompanied by a change in presentation currency. The choice of
presentation currency represents an accounting policy, and any change should be applied
retrospectively in accordance with Ind AS 8, unless impracticable. This means that the change
should be treated as if the new presentation currency had always been the entity's
presentation currency, with comparative amounts being restated into the new presentation
currency.
20.13
INDAS 21
(10) FOREIGN CURRENCY FINANCIAL STATEMENTS
• If the presentation currency differs from the entity's functional currency, it translates its
results (Profits/Losses) and financial position (B/S) into the presentation currency.
• For consolidation purpose, if group contains individual entities with different functional
currencies, the results and financial position of each entity are expressed in a common
currency so that consolidated financial statements may be presented.
RULES FOR TRANSLATION TO PRESENTATION CURRENCY

Case – 1 If the functional currency (of the entity whose financial statements are to be
translated into presentation currency) is not currency of a hyper in flationary economy:
ASSETS & LIABILITIES RATE AT REPORTING DATE

INCOME & EXPENSES AND RATE AT THE DATE OF TRANSACTION
CAPITAL TRANSACTIONS (OR AVERAGE RATE)
ALL THE RESULTING EXCHANGE DIFFERENCES CLASSIFIED AS OCI
(Such differences to be transferred to P&L on disposal)
WHAT WHAT RATE HOW to present DIFFERENCES
}
Assets (including goodwill) and => Closing rate
liabilities In other comprehensive income
Income and expenses => Historical rate (average) CTD
share capital/equity items => not specified
Case – 2 If the functional currency (of the entity whose financial statements are to be
translated into presentation currency) is currency of a hyper inflationary economy:
Assets, liabilities, equity items, Income Closing Rate at the date of the most
& expenses, including comparatives recent Balance Sheet
In other words, when the entity's functional as well as presentation currency is a currency of
hyperinflationary economies, all items in the financial statements (current period and
comparatives) are translated into the presentation currency at the closing rate at the end of the
most recent period presented after being restated for the effects of inflation.
The financial statements should be restated in accordance with IndAS 29 before translating
into the presentation currency.
20.14
INDAS 21
Currency to which if translated is currency of a non-hyperinflationary economy; comparative
amounts shall not adjusted for subsequent changes in price level or subsequent changes in
exchange rate.
Characteristics of Hyperinflationary economy (Ind AS 29)

• Preference of investment of wealth in a relatively stable foreign currency/ non-monetary
assets
• All monetary amounts are quoted in relatively stable currency rather than local currency
• Sales and purchases on credit take place at prices that compensate for the expected loss of
purchasing power during the credit period, even if the period is short
• Interest rates, wages and prices are linked to a price index
• The cumulative inflation over three years is approaching, or exceeds, 100 percent
20.15
INDAS 21
(11) HOW TO TRANSLATE ITEMS OF FINANCIAL
STATEMENTS OF A FOREIGN OPERATION?
Same as above Case 1 and Case 2 of point no. 10 along with following
points:
1. When there is difference in the year end of foreign operation and that of the reporting
entity, the foreign operation often prepares additional statements as of the same date as
the reporting entity's financial statements. When such financial statements are not
prepared, IndAS 110 allows the use of a different date provided that the difference is no
greater than 3 months. In such case the assets and liabilities of the foreign operations are
translated at the exchange rate at the end of the reporting period of the foreign operation.
Adjustments are made for significant changes in exchange rates upto the end of the
reporting period of the reporting entity.A similar approach is used in applying the equity
method to associates and joint ventures in accordance with Ind AS 28, Investment in
Associates and Joint Ventures.
2. Any Goodwill arising on the acquisition of a foreign operation and any fair value adjustment
to the carrying amounts of Assets and Liabilities arising on the acquisition of that foreign
operation shall be treated as Assets and Liabilities of the foreign operation. Thus they shall
be translated at the closing rate.
3. Share of Accumulated Exchange difference shall be proportionately allocated to NCI under
Consolidated Financial Statements.
4. INTRA-GROUP TRANSACTIONS:
Although intra-group balances are eliminated on consolidation, any related foreign
exchange gains or losses will not be eliminated. This is because the group has a real
exposure to a foreign currency since one of the entities will need to obtain or sell foreign
currency in order to settle the obligation or realise the proceeds received.
Accordingly, in the consolidated financial statements of the reporting entity, the

exchange difference arising on such intra group transactions is recognised in the
statement of profit or loss account unless it arises from on a monetary item that forms part
of a reporting entity's net investment in a foreign operation in which case it is taken to other
comprehensive income and accumulated in a separate component of equity and reclassified to
profit or loss only on disposal of the foreign operation;
20.16
INDAS 21
Example 6
Parent P has USD as its functional currency and Subsidiary S has Euro as its functional
st th
currency. P, whose reporting date is 31 March, lends USD 100 to S on 30 September, 20X1. S
converted the loan amount received into Euro on receipt.
USD EURO
th
Exchange rate at 30 September, 20X1 1 =1.5
st
Exchange rate at 31 March, 20X2 1 =2.0
Entries in the books of account of S

Date Particulars
th
30 September, Bank A/c Dr. 150 Euro
20X1 To Intra group payable 150 Euro
(To recognize intra-group loan)
st
31 March, 20X2 Exchange loss A/c Dr. 50 Euro
To Intra-group payable 50 Euro
(To recognize exchange loss on intra-group loan)
st
In S's second entry, the liability is re-measured at 31 March, 20X2 and a translation loss
is recorded.
Entries in the books of account of P
th
30 September, 20X1 Intra group receivable Dr. 100
To Cash 100
(To recognize intra-group loan on issue)
st
On consolidation at 31 March, 20X2, the receivable and payable (in respect of Intra-group
receivable and payable) will be eliminated. However, an exchange loss equivalent to EURO 50
for the year ended 31stMarch, 20X2 will remain on consolidation. This is appropriate because S
will need to obtain USD in order to repay the liability. Therefore, the group has a foreign
currency exposure. The exchange loss will be taken to consolidated profit or loss, unless the
loan forms part of P's net investment in S in which case it will be transferred to other
comprehensive income at the time of consolidation.
20.17
INDAS 21
(12) DISPOSAL OF A FOREIGN OPERATION
1. On disposal of foreign operation - Transfer cumulative amount of exchange difference from
equity to profit and loss A/c.
2. On Partial disposal of foreign operation - Transfer proportionate share of cumulative
amount of exchange difference from equity to profit and loss A/c.
3. On Partial disposal of Subsidiary that includes foreign operation – Reattribute the
proportionate share of the cumulative amount of the exchange difference recognised in OCI
to the Non-Controlling Interest (Minority Interest) in that Foreign Operation. (In case of
without loss of control)
4. On Partial disposal of Subsidiary that includes foreign operation – Reclassify the
proportionate share of the cumulative amount of the exchange difference recognised in OCI
to the Profit and Loss A/c. (In case of with loss of control). Also the cumulative amount of
ED already reflected as part of NON Controlling interest are Derecognized and included in
the calculation of profit or loss on disposal.
Loss of Control on Disposal No Loss of Control on Disposal

De-recognise the following: Proportional CTD shall be
• Net Assets of Subsidiary transfer to NCI from Equity.
• NCI in Subsidiary
• Cumulative Translation (No de-recognition of entire
CTD, NA and NCI)
Difference
• Goodwill
Difference shall be transfer to P&L
Example 7:
A parent has 100% interest in a subsidiary for a number of years. The subsidiary has been
classified as a foreign operation and Rs. 5 million relating to the translation differences of
subsidiary has been recognised in other comprehensive income and accumulated in a separate
component of equity. The parent disposes of 30% of its interest but retains control. What
would be the treatment on the date of disposal?
Answer: Rs. 1.5 million (5*30%) of cumulative translation exchange differences are
transferred within equity from foreign currency translation reserve to non-controlling
interest. No amounts are reclassified to profit or loss.
Example 8:
A parent has 80% interest in a subsidiary for number of years. The subsidiary has been
classified as a foreign operation and Rs. 5 million have been recognized in other
comprehensive income. 80% have been accumulated in a separate component of equity and
balance 20% attributed to non-controlling interest. The parent disposes 40% of its interest
20.18
INDAS 21
resulting in loss of control. What would be treatment on date of disposal?
Answer: Rs. 4 million (5*80%) of cumulative translation exchange differences are
transferred from equity to profit and loss. Rs. 1 million already reflected as part of non-
controlling interest are derecognized and included in the calculation of the profit or loss on
disposal.
(13) TAX EFFECTS OF ALL EXCHANGE DIFFERENCES

Gains and Losses on foreign currency transactions and exchange difference arising on
translating the results and financial position of an entity (including foreign operation) into a
different currency may have TAX Effect. Ind AS 12 applies to these effects.
20.19
INDAS 21
Student Notes:-
20.20
INDAS 21
TOPIC 18
INDAS 19 - EMPLOYEE BENEFITS
Quote:
Make each day your Masterpiece...
Index
1 Objective of the Standard 18.2
2 Applicability of the Standard 18.2

3 Employee Benefits Includes What? 18.2
4 Types of Employee Benefits 18.3

5 Post Employment Employee Benefits including 18.4
Long Term Employee Benefits
6 Modification - Past Service Cost 18.8
7 Curtailments & Settlements 18.8
8 Short Term Employee Benefits 18.9
9 Termination Benefits 18.12
10 Major Difference between IndAS 19 & AS 15 18.13
INDAS 19
1.OBJECTIVE
The objective of this Standard is to prescribe the accounting and disclosure for employee
benefits. It requires an enterprise to recognise:
(a) A liability when an employee has provided service; and
(b) An expense when the enterprise consumes the economic benefit arising from service provided
by an employee in exchange for employee benefits.
2.APPLICABILITY
This Standard should be applied by an employer in accounting for all employee benefits, except
employee share-based payments covered under IndAS 102.
3.EMPLOYEE BENEFITS INCLUDEs

(a) Formal plans or other formal agreements between an enterprise and employees;
(b) Under legislative requirements or through industry arrangements where entities are required
to contribute to the National, State or Industry plans; OR
(c) By those informal practices that give rise to a Constructive obligation.
CONSTRUCTIVE OBLIGATION:
An Obligation to pay that arises out of entity's actions rather than a contract. It may typically
occur from past conduct.
Example 1: Established Pattern of Past Practice, published policies, or specific statement by

which entity has indicated to other parties that it will accept certain responsibilities and as a
result of which entity has created a valid expectation on the part of those parties that it will
discharge their responsibilities.
18.2
INDAS 19
4.TYPES OF EMPLOYEE BENEFITS
(a) SHORT-TERM EMPLOYEE BENEFITS, which are expected to be settled wholly
before Twelve Months after the end of reporting period, such as wages, salaries and social
security contributions (e.g., contribution to an insurance company by an employer to pay for
medical care of its employees), paid annual leave, profit-sharing and bonuses (if payable
within twelve months nonmonetary benefits (such as medical care, housing, cars and free or
subsidised goods or services) for current employees;
(b) POST-EMPLOYMENT BENEFITS, which are payable after the completion of

employement such as gratuity, pension, other retirement benefits, post-employment life
insurance and post-employment medical care;
C) OTHER LONG-TERM EMPLOYEE BENEFITS, including long-service leave or

sabbatical leave, long-term disability benefits and, profit-sharing bonuses and deferred
compensation; and
(d) TERMINATION BENEFITS are employee benefits provided in exchange for the
termination of an employee's employment as a result of either:
(a) An entity's decision to terminate an employee's employment before the normal
retirement date; or
(b) An employee's decision to accept an offer of benefits in exchange for the termination
of employment. (VRS)
Employee benefits include benefits provided to either employees or their dependents or
beneficiaries:
Note: An employee may provide services on a full-time, part-time, permanent, casual or

temporary basis. Employees include whole-time directors and other management personnel.
18.3
INDAS 19
5.POST-EMPLOYMENT BENEFITS &
OTHER LONG TERM EMPLOYEE BENEFITS
5.1 DIFFERENCE BETWEEN DEFINED BENEFIT PLANS AND DEFINED

CONTRIBUTION PLANS
Defined Contribution Basis of Defined Benefit Plans

Plans (DCP) Difference (DBP)
Entity pays fixed
contributions into a
separate entity (a fund)
and will have no legal or Post-employment benefit
constructive obligation to pay Meaning plans other than defined
further contributions if the contribution plans
fund does not hold sufficient
assets to pay all benefits
Obligation is limited to the Employers' Obligation is to provide

amount that it agrees to Obligation agreed benefits to current
contribute. (Amount Payable) and former employees.
(Obligation is not limited)
If actuarial or investment
No Change in the experience are worse than
Change in the
contribution made except expected, the entity's
obligation
some extreme conditions obligation may be increased
for providing to the employees.
Actuarial Risk
Risk in substance on the Risk in substance on the
(Benefits will be
Employee entity
more/less than expected)
Risk in substance on the Risk in substance on the
Investment Risk
Employee. entity.
Provident Fund
Examples Gratuity
Contribution by employer
Actuarial
Not Required Required
Assumptions
Not Required except where
the obligation falls due
after twelve months after Discounting Always Required
the end of the annual
reporting period in which
the employees render the
related service.
18.4
INDAS 19
5.2 ACCOUNTING FOR DEFINED BENEFIT PLANS
Summary:
1. Calculate Current Service Cost (CSC) using actuarial assumptions under “Projected unit
credit method”. CSC means the amount of expense to be recognised every year against the
services performed by the employees. CSC is always calculated by discounting technique, since
the service has been performed but the amount to be paid in future. It is shown under Employee
Benefit Expense in Profit and Loss A/c.
2. Calculate Interest on defined benefit liability using same discounting rate used in CSC. It is show
under Finance Cost in Profit and Loss A/c
3. The discount rate shall be determined by reference to market yields at the end of reporting
period on Government Bonds.
However, subsidiaries, associates, joint ventures and branches domiciled outside India shall
take discount rates by reference to market yields at the end of the reporting period on high
quality corporate bonds.
4. CSC and Interest on defined benefit Liability is charged to Profit & Loss A/c and corresponding
liability is credited in the name of PV of defined benefit Liability or defined benefit obligation
payable.
5. Determine the Fair Value of Plan Assets (Investments made)
6. We have to present Net defined benefit liability (asset) by deducting Fair Value of Plan Assets
from PV of defined benefit liability.
7. If it is deficit then – Net defined benefit liability, if it is surplus then net defined benefit asset.
8. Asset is to be show at lower of :
The surplus in the defined benefit plan; and
The asset ceiling, determined using the discount rate.
9. Asset ceiling is:

Present Value of any economic benefits available in the form of:
· Refunds from the Plan
Or
· Reductions in future contributions to the plan
10. Re-measure the liability if there is change in estimates and actuarial assumptions, any change
is known as Actuarial Gain or Loss and transfer to OCI
11. How to Calculate Expected Return?

First of all we have to check whether separate Rate (%) is given for calculation of expected
return, if not given then we shall take same discount rate which is used to calculate the
Interest on Defined benefit obligation.
Now, next issue is on which value such Rate (%) should be applied to calculate the expected
return? For this we have to check the question's information and follow below guidance:
a. If Contributions made to Plan Assets and Benefits paid at the end of the year then apply
the Rate (%) on Opening Balance of Plan Assets.
18.5
INDAS 19
b. If Contributions made to Plan Assets & Benefits paid in the beginning of the year then apply
the Rate (%) on (Opening Balance + Contributions Made – Benefits Paid).
c. If Contributions made to Plan Assets & Benefits paid in the mid of the year then Six
Monthly Rate of Expected Return as under:
Above Six monthly rate on plan assets shall be applied twice in a year, first time on opening balance
st
and second time on (opening balance + 1 half Return + contribution made – benefits paid).\
[ 1+ annaul rate - 1 ] × 100

Above Six monthly rate on plan assets shall be applied twice in a year, first time on opening balance
st and second time on (opening balance + 1 half Return + contribution made – benefits paid).
Author's Note:
1. If nothing is mentioned in the question about timing of contributions made and benefits paid
then we shall assume that it is made at the end of the year and Expected Return shall be
calculated on Opening Balance of Plan Assets only.
2. Expected return is charged to Profit and Loss A/c under Finance Cost (net of interest on
defined benefit liability)
12. At every BS date, re-measure the Plan assets at Fair Value. Any change on re-measurement is
called Actuarial loss or gain and transfer to OCI.
13 Items to be shown in Profit and Loss A/c:

· Current service cost under Employee benefit expenses
· any Past service cost and gain or loss on settlement (curtailment) under employee benefit
expenses
· Net interest on the net defined benefit liability (asset) under finance cost.
14. Items to be shown in OCI:

Following items shall be recognised to Other Comprehensive Income (OCI):
(i) Actuarial gains and losses on defined benefit Liability due to change in actuarial
assumptions.
(ii) Actuarial gains and losses on Plan assets due to measuring the Plan Assets at Fair Value; and
(iii) Any change in the effect of the asset ceiling, excluding amounts included in net interest on
the net defined benefit liability (asset).
15. Items to be shown in Balance sheet:

Net defined liability (deficit ) or Net defined asset (Surplus)
18.6
INDAS 19
16. Current/Non-current Distinction:
This Standard does not specify whether an entity should distinguish current and non-current
portions of assets and liabilities arising from post-employment benefits.
17. Actuarial Assumptions comprise -

i. Demographic assumptions such as mortality, employee turnover rate, disability, early
retirement, claims rates under medical plans and;
ii. Financial assumptions such as discount rate, future salary, expected rate of return on plan
assets.
18. Offset:
An asset relating to one plan will be offset against a liability relating to another plan in case the
entity:
(a) Has a legally enforceable right to use a surplus in one plan to settle obligations under the
other plan; and
(b) There is an intention either to settle the obligations on a net basis, or to realise the surplus
in one plan and settle its obligation under the other plan simultaneously.
18.7
INDAS 19
6. PAST SERVICE COST due to MODIFICATION
Meaning of PSC - Change in the present value of the defined benefit obligation resulting from a
plan amendment is known as past service cost.
An entity shall recognise past service cost as an expense at the earlier of the following dates:
(a) When the plan amendment occurs; and
(b) When the entity recognises related restructuring costs (refer Ind AS 37 Provisions,
Contingent Liabilities and Contingent Assets) or termination benefits.
· Entire PSC should be charged to P&L immediately, no need to defer. Whether benefits are
vested or not, entire PSC shall be charged to P&L immediately at the time of modifications.
· Example of Past Service Costs: due to the recent amendments in Gratuity Act, 1972 there is
substantial increase in the gratuity liability of the company (i.e. from 10 lacs to 20 lacs). Such
increase in liability would be regarded as Past Service Cost.
7. CURTAILMENTS AND SETTLEMENTS

· Curtailment or Settlement is a transaction that eliminates all further legal or constructive
obligations for part or all of the benefits provided under defined benefit plan.
· In a simple language, if Defined Benefit Obligation plan is modified in such a way that employees
are not getting benefit, rather benefit originally planned is being reduced, it is called
curtailment.
· An enterprise should recognize gains or losses on the curtailment when the curtailment occurs.
Journal Entry:
Defined benefit Liability A/c Dr. (Curtailment Amt.)
To Gain on Curtailment A/c (Balancing Fig)
· Gain on curtailment shall be transfer to Statement of P&L under Employee Benefit Expense.
18.8
INDAS 19
8. SHORT-TERM EMPLOYEE BENEFITS
(NO ACTURIAL ASSUMPTION)
(I) Accounting for short-term employee benefits is generally straightforward short-term
employee benefit obligations are measured on an undiscounted basis.
(II) It involves no actuarial assumptions to be made, hence there is no accounting required for any
actuarial gain/loss.
8.1 SHORT-TERM COMPENSATED ABSENCES

An employer normally compensates an employee on account of his absence either by granting
privilege leave (vacation leave), or sick leave, or maternity or paternity leave etc. These
compensated balances fall under two categories and recognize the expected cost in the form of
paid absences as follows:
(a) Accumulating paid absences - recognized when the employees render service that increases
their entitlement to future paid absences; and
(b) Non-accumulating paid absences - recognized when the absences occur.
When the employees
render service that
Accumulating increases their
Short Team Paid entitlement to future
Absences paid absences
Non-Accumulating When the absences
aoccur
Accumulating Paid Absences:

These are the absences that are carried forward and can be used in future periods if the
employee is not able to use them in current reporting period of the employer. They can be either:
(i) Vesting: In this case, employees are entitled to a cash-payment for the unutilised
entitlement at the time of leaving the entity.
(ii) Non-vesting: In this case, employees are not entitled to a cash payment for unused
entitlement on leaving.
Measurement: An entity shall measure the expected cost of accumulating compensated
absences as the additional amount that the entity expects to pay as a result of the unused
entitlement that has accumulated at the end of the reporting period.
Mr. Jatin (employee)

3 Leaves are allowed per month.
Monthy Salary of Jatin = 60000/- Per day salary = 2000/-
Arg. working days => 30 days.
in a month
18.9
INDAS 19
March 21 April 21
No leaves were taken by Jatin Jatin took 6 days Leave in April
Salary Paid = 60000/- Salary Paid = 60000/-
3 day leaves accoumulated & C/F
1. Salary a/c Dr. 66000 1. Salary a/c Dr. 54000

To salary payable 66000 To salary payable 54000
2. Salary Payable Dr. 60000 2. Salary Payable Dr. 60000

To Bank 60000 To Bank 60000
COVID-19 IMPACT ON INDAS 19

FAQ 37
As a consequence to Government's preventive measures to contain the spread of COVID-19,
entities have been asked to close down the offices since last week of March 2020 and employees
have been advised to work from home and in some cases temporary leaves have been granted. In
case of employees sent on temporary leaves but with full pay, whether the salary paid can be
deferred and charged to statement of profit and loss when they resume the work?
Answer
In the given case, the employees are in the service of employer and the salaries/wages paid for
temporary leaves will be categorised as short-term employee benefits as defined in Ind AS 19.
The entity is required to account for these employee benefits in accordance with the provisions of
paragraph 11 of Ind AS 19. In accordance with paragraph 11, the entity continues to recognise the
employee salaries for temporary leave as short-term employee benefits expenses as and when
incurred unless another Ind AS requires or permits the inclusion of the benefits in the cost of an
asset (see, for example, Ind AS 2, Inventories, and Ind AS 16, Property, Plant and Equipment).
18.10
INDAS 19
8.2 PROFIT-SHARING AND BONUS PLANS
An enterprise should recognise cost of profit-sharing and bonus payments when:

(a) The enterprise has a present legal or constructive obligation to make such payments as a
result of past events; and
(b) A reliable estimate of the obligation can be made. A present obligation exists when, and only
when, the enterprise has no realistic alternative but to make the payments.
(c) Therefore, an entity recognises the cost of profit-sharing and bonus plans not as a
distribution of profit but as an expense.
18.11
INDAS 19
9. TERMINATION BENEFITS
An entity is required to recognise a liability and expense for termination benefits at the earlier of
the following dates:
(a) When the entity can no longer withdraw the offer of those benefits; and
(b) When the entity recognises costs for a restructuring which is within the scope of Ind AS 37
and involves the payment of termination benefits.
Example on Termination Benefits

As a result of a recent acquisition, an entity plans to close a factory in ten months and, at that
time, terminate the employment of all of the remaining employees at the factory. Because the
entity needs the expertise of the employees at the factory to complete some contracts, it
announces a plan of termination as follows:
Each employee who stays and renders service until the closure of the factory will receive on the
termination date a cash payment of Rs 30,000. Employees leaving before closure of the factory
will receive Rs 10,000.
There are 120 employees at the factory. At the time of announcing the plan, the entity expects 20
of them to leave before closure. Therefore, the total expected cash outflows under the plan are
Rs. 3,200,000 (ie 20 × Rs10,000 + 100 × Rs 30,000). As required by paragraph 160, the entity
accounts for benefits provided in exchange for termination of employment as termination
benefits and accounts for benefits provided in exchange for services as short-term employee
benefits.
Termination benefits
The benefit provided in exchange for termination of employment is Rs 10,000. This is the amount
that an entity would have to pay for terminating the employment regardless of whether the
employees stay and render service until closure of the factory or they leave before closure. Even
though the employees can leave before closure, the termination of all employees' employment is a
result of the entity's decision to close the factory and terminate their employment (ie all
employees will leave employment when the factory closes). Therefore, the entity recognises a
liability of Rs1,200,000 (ie 120 × Rs10,000) for the termination benefits provided in accordance
with the employee benefit plan at the earlier of when the plan of termination is announced and
when the entity recognises the restructuring costs associated with the closure of the factory.
Benefits provided in exchange for service

The incremental benefits that employees will receive if they provide services for the full ten-
month period are in exchange for services provided over that period. The entity accounts for
them as short-term employee benefits because the entity expects to settle them before twelve
months after the end of the annual reporting period. In this example, discounting is not required,
so an expense of Rs200,000 (ieRs2,000,000 ÷ 10) is recognised in each month during the service
period of ten months, with a corresponding increase in the carrying amount of the liability.
18.12
INDAS 19
10. MAJOR DIFFERENCES BETWEEN AS 15 & IND AS 19
Basis Of Differences AS 15 IND AS 19
CONSTRUCTIVE AS 15 does not deal with Employee benefits arising
OBLIGATION Constructive Obligation from Constructive
obligations are also covered.
RECOGNITION OF Actuarial Gains or Losses This standard requires to
ACTUARIAL GAINS OR are recognised immediately recognize Actuarial Gain or
LOSSES in the P&L A/c Loss in OCI
DISCOUNTING RATE Discount rate should be based Discount rate shall always be
on Market Yields on High calculated by reference to
Quality Corporate Bonds. the Market Yields on
If there is no deep market in Government Bonds.
such bonds, Market Yields on
Govt. Bonds can be taken for
Discount Rate.
PAST SERVICE COST To the extent the benefits Entire PSC should be charged
are vested, PSC is charged to to P&L immediately, No need
P&L. to defer.
For benefits not yet vested,
the PSC is amortised on
straight line basis over the
remaining period of vesting.
18.13
INDAS 19
Student Notes:-
18.14
INDAS 19
TOPIC 14
INDAS 12 - INCOME TAXES
Quote:
“Develop An 'Attitude Of Gratitude'. Say Thank You
To Everyone You Meet For Everything They Do For You.”
Index
1 IMPORTANT DEFINITIONS 14.3
2 TAX BASE 14.4

3 CURRENT TAXES i.e. CURRENT TAX ASSET & 14.6
CURRENT TAX LIABILITY
4 DEFERRED TAX LIABILITY 14.8
5 DEFERRED TAX ASSET 14.12
6 MISC PROVISIONS ON DTA & DTL 14.14
7 DISCLOSURE 14.16
8 SPECIAL SITUATIONS 14.17
9 UNCERTAINITY OVER INCOME TAX TREATEMENT 14.23
10 MORE ILLUSTRATIONS on INDAS 14.24
INDAS 12
Benjamin Franklin once wrote: “In this world nothing can be said to be certain, except death and
taxes“. Income tax is something that can hardly be avoided by a profit-making company.
Objective of
INDAS12
14.2
INDAS 12
(1) - IMPORTANT DEFINITIONS
1. Accounting income is the net profit or loss for a period, as reported in the statement of profit
and loss, before deducting income tax expense or adding income tax saving.
2. Taxable income (tax loss) is the amount of the income (loss) for a period, determined in
accordance with the tax laws, based upon which income tax payable (recoverable) is
determined.
3. Tax expense (tax saving) is the aggregate of Current tax and Deferred tax charged or
credited to the statement of profit and loss for the period.
4. Current tax is the amount of income tax determined to be payable (recoverable) in respect of
the taxable income (tax loss) for a period.
5. Deferred tax is the tax effect of Temporary differences.
6. Temporary Differences: is a difference between the carrying amount of an Asset or Liability

and its Tax Base Balance sheet Method.
7. Tax Base: is the amount that will be deductible for Tax purpose. If the economic benefits will
not be taxable or deductable, the tax base of the asset is equal to its carrying amount.
8. Taxable Temporary Differences: are temporary differences that will result in taxable
amounts in determining taxable profits of future periods. It arises DTL
9. Deductible Temporary Differences: are temporary differences that will result in amounts
that are deductible in determining taxable profits of future periods. It results in DTA subject
to probability.
14.3
INDAS 12
(2) - TAX BASE
Let us understand the concept of TAX BASE in detail:
What is a Tax Base?

Tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
In my opinion, this definition does not say that much, so let's explain it in a greater detail…
Tax base of an Asset?

Tax base of an asset is the amount that will be deductible for tax purposes against any taxable
economic benefits that will flow to an entity when it recovers the carrying amount of the asset.
For example, when you have an interest receivable and interest revenue is taxed on a cash basis,
then the tax base of interest receivable is 0. Why? Because when you actually receive the cash
and remove the interest receivable from your books, you will need to include full amount of cash
received into your tax return. At the same time you cannot deduct anything from this amount for
tax purposes.
Careful about items not shown in your balance sheet!

If you review all your assets and liabilities calculating their tax bases, be careful! There could be
some items not recognized in your balance sheet that still do have a tax base.
For example, you might have incurred some research costs included in the profit or loss in the
past that you could not deduct for tax purposes until later periods. In such a case, the research
costs are not shown in your statement of financial position but they do have a tax base.
This is What You Should Ask First:

Before trying to set a tax base of any asset or liability, ask yourself these questions:
Ÿ What happens when in the future I recover this asset or settle this liability and remove it from
my balance sheet?
Ÿ Will this removal affect my tax payments in the period of recovery or settlement?
Ÿ In other words, will I have to make some adjustment to my accounting profit in order to arrive to
taxable profit?
Ÿ If the answer is yes, then the tax base of this asset or liability is for sure different from its
carrying amount.
Ÿ If not, then the tax base of this asset or liability equals to its carrying amount.
14.4
INDAS 12
Example 1:
Entity A had acquired an item of plant and machinery for ` 1,00,000 on 1st April, 20X1. It
depreciated this item @ 10% per annum on SLM basis. For the year ended 31st March, 20X2, it
provides depreciation of ` 10,000. The carrying amount of this item of plant and machinery as on
31st March, 20X2 is ` 90,000. As per taxation laws, this item of plant and machinery has to be
depreciated @ 30% per annum on WDV basis. The entity thus for the purposes of taxation
computes depreciation of ` 30,000. The tax base of this item of plant and machinery is ` 70,000 (`
1,00,000 – ` 30,000).
In the above scenario, if Entity A decides to revalue the item of plant and machinery and
measures it at ` 1,50,000, the carrying value of the item of plant and machinery will be ` 1,50,000.
For tax purposes, if the revaluation is ignored, the tax base is ` 70,000 (Initial cost ` 1,00,000 – `
30,000).
For Assets For Liabilities

If carrying amount > tax Taxable Temporary Deductible Temporary
base Difference Difference
Deferred Tax Liability Deferred Tax Asset

(e.g. WDV as per books > (e.g. Provision for Bonus as
WDV as per Income Tax) per books > Provision for
Bonus as per IT)
If carrying amount < tax Deductible Temporary Taxable Temporary

base Difference Difference
Deferred Tax Asset Deferred Tax Liability

(e.g. WDV as per books < (e.g. Loan carrying amount
WDV as per Income Tax) as per books< Loan carrying
amounts as per tax)
If carrying amount = tax No temporary difference No temporary difference

base
14.5
INDAS 12
(3) - CURRENT TAXES i.e. CURRENT TAX ASSET &
CURRENT TAX LIABILITY
Now let's understand the concept of Current Tax Asset and Current Tax
Liability:
(a) Current tax liability

v Current tax for current and prior periods shall, to the extent unpaid, be recognised as a
liability (also known as Provision for Tax)
v The exact liability of current tax crystallises only on preparation and finalisation of financial
statements at the end of the reporting period.
v Any excess of this liability over the prepaid taxes (advance tax) and withhold taxes (TDS) is
to be treated as current liability. This liability may be for the current reporting period or
may relate to earlier reporting periods.
(b) Current tax assets

v If the amount already paid in respect of current and prior periods exceeds the amount due
for those periods, the excess shall be recognised as an asset.
v Further, wherever tax loss of a reporting period could be carried backwards, the entity is
eligible as per tax laws to a benefit. The entity recognises this benefit as an asset in the
period in which the tax loss occurs because it is probable that the benefit will flow the
entity and the benefit can be reliable measured.
Example 2:
An entity has paid a tax in the previous year on a profit of Rs. 5,00,000 and suffered a loss in
the current year of Rs. 6,00,000. Such loss of Rs. 6,00,000 can be adjusted against the Profit
to the extent of Rs. 5,00,000 and the entity will create Tax Asset to that extent. It is called
carry backward of losses.
Measurement of Current Assets and Current Liabilities:

(A)
Current tax liabilities (assets) for the current and prior periods shall be measured at the
amount expected to be paid to (recovered from) the taxation authorities, using the tax rates
(and tax laws) that have been enacted.
(B) Enacted or substantively enacted

v The tax rates in computing the current tax should be based on taxation laws that have
enacted or substantively enacted.
v A proposed legislation is enacted when all the formalities with respect to the legislation is
completed. In India, the enactment occurs when the legislation is notified in the gazette on
14.6
INDAS 12
and from the date it comes into force as mentioned in the said gazette notification.
v Implicit in the word 'substantively enacted' is the emphasis that in the relevant situation
the enactment process is not fully completed. The process of enactment of a taxation laws in
India is as under:
ü Finance bill is presented in Lok Sabha of Indian Parliament.
ü It is discussed and passed by the Lok Sabha.
ü It then moves to Rajya Sabha of Indian
ü It is then presented before the President for assent.
ü It is then notified in the gazette of India.
Offsetting Current Tax Assets and Current Tax Liabilities:
An enterprise should offset assets and liabilities representing tax if the enterprise:
(a) Has a legally enforceable right (when Tax Laws Allow) ; and
(b) Intends to settle the asset and the liability on a net basis.
Note:
In consolidated financial statements, a current tax asset of one entity in a group is offset
against a current tax liability of another entity in the group if, and only if, the entities
concerned have a legally enforceable right to make or receive a single net payment and the
entities intend to make or receive such a net payment or to recover the asset and settle the
liability simultaneously.
14.7
INDAS 12
(4) - DEFERRED TAX LIABILITY
You need to recognize deferred tax liability for all taxable temporary differences you
discovered, EXCEPT for the following TWO Situations:
Situation 1
No deferred tax liability shall be recognized from Initial Recognition of GOODWILL.
Author's Note:
Pls understand, here we are talking about NO DTL on Recognition of Goodwill, that means we pass
journal entry of Net Assets Recognition and Purchase Consideration the difference will be
Goodwill/CR as per IndAS 103. If it results in Goodwill then the Tax Base of that Goodwill will be
Nil (if there is No Tax treatment under Income Tax), hence in this situation there will be a
Permanent Difference.
Example 3:
An entity acquires a subsidiary and pays Rs. 1,00,000. The fair value of net identifiable assets is
Rs. 65,000. The following entry shall be made in the books:
Entry 1:
Goodwill Dr. 35,000
Net Assets Dr. 65,000
To Consideration 1,00,000
The tax base of goodwill is Rs Nil. Hence the difference is Rs. 35,000. Assuming tax rate to be
30%, deferred tax liability of Rs. 10,500 needs to be created. Now because of recognition of this
deferred tax liability, the following entry needs to be passed instead of the above entry:
Entry 2:
Goodwill (b/f) Dr. 45,500
Net assets Dr. 65,000
To Consideration 1,00,000
To Deferred tax liability 10,500
The difference now is Rs. 45,500 and not Rs. 35,000 and the resultant deferred tax liability
should be Rs. 13,650 (45,500 x 30%) and not Rs. 10,500. Thus, deferred tax liability in entry 2
should be increased by Rs. 3,150 which in turn will increase goodwill by a similar amount with
consequent impact on taxable temporary difference and deferred tax liability. The circle goes on.
Therefore, no deferred tax liability is to be recognised in the case of differences arising on the
initial recognition of goodwill in a business combination in tax jurisdiction where such goodwill is
not tax deductible.
14.8
INDAS 12
Situation 2
No deferred tax liability shall be recognized from initial recognition of any Asset or Liability in a
transaction other than a Business Combination and at the time of the transaction it affects neither
Accounting nor Taxable profit (loss). In this situation Tax Base will be assumed to be equal to the
Carrying Amount.
Example 4:
Entity A acquires a foreign made vehicle for Rs 1,00,000 directly from the vehicle manufacturer.
The transaction is not a part of any business combination. The tax laws do not permit any
depreciation thereon. Also, any profits at the time of sale are not taxable or losses are not tax
deductible. This vehicle thus has a tax base of Rs Nil. There is a taxable temporary difference of
Rs 1,00,000. Assuming a tax rate of 30%, the entity should create a deferred tax liability of Rs
30,000. But the Standard does not permit. Since it is a permanent difference and will never be
reversed, hence we assume the Tax Base as 1,00,000 so that difference should not arise.
So what are the areas where we can create DTL?

The most common areas of taxable temporary differenÅes giving rise to deferred tax liabilities
are:
1. Timing differences - Timing difference arises when the recognition of certain item in the
financial statements occurs in a different time than its recognition in tax return, for
example, interest received is taxed only when cash is received. e.g.: Depreciation & 100%
Scientific Research expenses deduction in Tax.
2. Business combinations - In a business combination identifiable Assets and Liabilities can

be revalued Upwards to Fair Value at the acquisition date, but no adjustment is made for
Tax Purposes. As a result, Taxable Temporary Difference will arise.
Author's Note:
Here we are not Taking about DTL on Goodwill (unlike above Situation 1) instead When Other
Assets and Liabilities are recognised at Fair Value based on IndAS 103, there Tax Base may differ
hence it will create Temporary Difference. Hence DTL will be created in the same entry of Net
Assets Recognition ultimately Goodwill or Capital Reserve may be affected.
3. Assets carried at fair value - When a company applies policy of revaluation (for example,
revaluation model for property, plant and equipment in line with Ind AS 16, 38, 116) and some
assets are revalued upwards to their fair value, taxable temporary difference will arise
through Revaluation Surplus (OCI).
14.9
INDAS 12
Example 5:
Machine Costing Rs. 100 lakhs.
Useful life = 10 years, depreciation = 10%. Tax depreciation = 20%.
At year 1 end: Book value of Machine = Rs. 90 lakhs
Tax Base of Machine = Rs. 80 lakhs therefore its Taxable Temporary difference of Rs. 10
lakhs. DTL is to be recognized.
Example 6:
The difference between the carrying amount of a revalued asset and its tax base is a temporary
difference and gives rise to a deferred tax liability or asset. This is true even if:
(a) The entity does not intend to dispose of the asset. In such cases, the revalued carrying
amount of the asset will be recovered through use and this will generate taxable income
which exceeds the depreciation that will be allowable for tax purposes in future periods; or
(b) Tax on capital gains is deferred if the proceeds of the disposal of the asset are invested in
similar assets. In such cases, the tax will ultimately become payable on sale or use of the
similar assets.
Example 7:
Company A buys an asset worth Rs. 100 on 1st April, 2010. The useful life of the asset is five
years and the tax laws allow it to be depreciated over four years. One year later, on 31st March,
2011, the Company revalue the asset to Rs. 120. Tax Rate is 30%. In such a case the temporary
difference wiäl be as shown in the following Table.
Solution :
Table
Year ending March 31, 2011 2012 2013 2014 2015
Net book value 120 90 60 30 0
Tax base 75 50 25 0 0
Temporary difference 45 40 35 30 0
In the above case, the deferred tax liability created on revaluation on 31st March, 2011, of
Rs.45 reverses in the subsequent periods. The accounting entry for the year 2011 would be:
Revaluation reserve (OCI) A/c Dr. 40x30%
Profit and Loss A/c Dr. 5x30%
To Deferred tax liability A/c 45x30%
Suppose on 31st March, 2013, the Company decides to sell the asset at Rs.70. In this case, there
would be a gain of Rs.10 as per the books of accounts. However, the tax books will show a gain of
Rs.45, thus offsetting the temporary difference of Rs. 35.
Detailed Calculation:
2011 2012 2013 2014 2015
CA without Revaluation 80 60 40 20 0
Tax Base 75 50 25 0 0
14.10
INDAS 12
Temporary difference due to 5 10 15 20 0
Depreciation
CA with Revaluation 120 90 60 30 0
Total Temp. Diff. 45 40 35 30 0
Temp. Diff. due to Revaluation 40 30 20 10 0
Example 8:
Ÿ Company A buys Company B for Rs. 1,500
Ÿ Book value of assets of B = 1 000
Ÿ Fair value of assets of B = 1,200
Ÿ Goodwill = 1,500 – 1,200 = 300
Ÿ Tax Rate = 30%
Ÿ Taxable temporary difference = 1,200 – 1,000 = 200
Ÿ DTL = 200x30% =60
Ÿ Goodwill = 300 + 60 = 360
ACCOUNTING ENTRY:
Goodwill A/c Dr. 60 (200 * 30%)
To DTL A/c 60
Example 9:
If the instrument is classified on initial recognition in two components viz. Equity and Liability
then Taxable temporary difference will arise since in books liability will have lower amount and in
tax base the entire amount is liability. Therefore DTL is recognized through Equity. The same
example has been explained as under -
8% Convertible Debentures issued of Rs. 10,00,000. Holders are given an option to convert the
instruments into equity shares or to receive cash after 5 years. Entity's IRR/Effective Rate of
Interest is 12% pa. Calculate the Deferred Tax Impact.
SOLUTION
By applying IndAS 109 Financial Instruments, following will be the Journal Entry at the time of
Issue of Debentures –
Bank A/c Dr. 10,00,000
To 8% Debentures (FL) A/c 8,56,000
To 8% Debentures (Equity) A/c 1,44,000
Now the Carrying Amount of Liability at the time of issue is 8,56,000 however the Tax Base will
be Rs. 10,00,000 therefore, Temporary Difference of Rs. 1,44,000 arises (because of IndAS
109 principle by segregating the Financial Instrument into Liability and Equity)
Hence DTL of Rs. 43,200 (assuming 30% Tax Rate i.e. 1,44,000 x 30%) will be created through
Equity at the time of issue as under-
Reserves A/c Dr. 43,200
To DTL A/c 43,200
14.11
INDAS 12
(5) - DEFERRED TAX ASSET
While you need to recognize deferred tax liability for all taxable temporary differences, here the
situation is different.
A deferred tax asset shall be recognized for all deductible temporary differences to the extent
that it is probable that taxable profit will be available against which the deductible temporary
difference can be utilized.
No deferred tax asset shall be recognized from initial recognition of asset or liability in a
transaction that is not a business combination and at the time of the transaction it affects neither
accounting nor taxable profit (loss). (i.e. Permanent difference)
The most common examples of deductible temporary differences giving rise to deferred tax
assets are:
1. Timing differences - Tiã ing difference arises when the recognition of certain item in the
financial statements occurs in a different time than its recognition in tax return, for
example, accrued expenses are tax deductible only when paid.
2. Business combinations - In a business combination identifiable assets and liabilities can be
Author's Note:
Here we are not taking about DTA on Goodwill, instead When Other Assets and Liabilities are
recognised at Fair Value based on IndAS 103, there Tax Base may differ hence it will create
Temporary Difference. Hence DTA will be created in the same entry of Net Assets Recognition
ultimately Goodwill or Capital Reserve may be affected.
3. Assets carried at fair value - When a company applies policy of revaluation (for example,
revaluation model for property, plant and equipment in line with INDAS 16, 38, 116) and some
assets are revalued downwards to their fair value, deductible temporary difference arises
through P&L.
Example 10: (Unrealized Gain on Consolidation):

Ÿ Company X (Holding) sold goods costing ₹ 60 to Company Y (Subsidiary)
Ÿ In the Standalone Balance Sheet of Y stock is shown at ₹ 100
Ÿ In the Consolidated Balance Sheet Stock will be shown at ₹ 60
Ÿ Tax base for Y is ₹ 100 and Y's Tax rate is 30%, X's Tax rate is 25%
Ÿ Deductible Temporary Difference = 100-60 = ₹ 40
Ÿ DTA = Rs.40 x 30% = ₹12
ACCOUNTING ENTRY:
Deferred Tax Asset A/c Dr. 12
To Profit and Loss A/c 12
14.12
INDAS 12
Example 11: (Research Cost) -
Carrying amount is nil (because entire amount is treated as an expense to determine accounting
profit) and tax base is the amount which will be deductible in future. Difference is deductible
temporary difference that results in a DTA through P&L.
(5.1) - DTA ON UNUSED TAX LOSSES AND TAX CREDITS
A deferred tax asset shall be recognized for the unused tax losses carried forward and unused
tax credits to the extent that it is probable that future taxable profit will be available against
which the unused tax losses and unused tax credits can be utilized.
However existence of Unused tax losses and tax credits is a STRONG EVIDENCE that future
taxable profits may not be available.
To assess the probability that taxable profit will be available against which the unused tax losses
or unused tax credits can be utilised, the entity should consider the following:
(i) Whether it is probable that the entity will have taxable profits before the unused tax losses
(ii) Whether the entity has sufficient taxable temporary differences relating to the same
taxation authority and the same taxable entity, which will result in taxable amounts against
which the unused tax losses or unused tax credits can be utilised before they expire;
(iii) Whether the unused tax losses result from identifiable causes which are unlikely to
recur;(example - Covid 19 event)
and
(iv) Whether tax planning opportunities are available to the entity that will create taxable profit
in the period in which the unused tax losses or unused tax credits can be utilised.
Therefore, when an entity has a history of recent losses, the entity recognises a deferred tax
asset arising from unused tax losses or tax credits only to the extent that the entity has
sufficient taxable temporary differences or there is convincing other evidence that sufficient
taxable profit will be available in Future against which the unused tax losses or unused tax
credits can be utilised by the entity.
14.13
INDAS 12
(6) - MISC PROVISIONS ON DTA & DTL
1.MEASUREMENT OF DEFERRED TAXES
Ÿ In measuring deferred tax assets / liabilities you need to apply the tax rates that are
expected to apply to the period when the asset is realized or the liability is settled.
Ÿ However, these expected rates need to be based on tax rates or tax laws that have been
enacted or substantively enacted by=the end of the reporting period.
Ÿ So please, don't use some estimates of the future tax rates, as this is not allowed.
Ÿ Let me also point out that the measurement of deferred tax should reflect the tax
consequences that would follow from the manner of expected recovery or settlement.
Example 12: if in India, sales of property are taxed at 20% (long term gain) and other income at
30% (PGBP), then for calculation of deferred tax on your property you need to apply the tax rate
based on your expected way of property's recovery – if you plan to sell it, then measure your
deferred tax at 20% and if you plan to use it and then remove it, then measure your deferred tax at
30%.
2.HOW TO RECOGNIZE DEFERRED TAX ASSETS OR LIABILITIES?

In almost all situations you would recognize deferred tax as an income or an expense in profit or
loss for the period. There are just 2 exceptions of this rule:
· If a deferred tax arose from a transactions or events recognized outside profit or loss, then
you need to recognize deferred tax in the same way (in other comprehensive income or
directly in equity) (Ex. Revaluation reserve)
· If a deferred tax arose in a business combination, deferred tax affects goodwill or bargain
purchase gain (Capital Reserve).
14.14
INDAS 12
3.MANNER OF RECOVERY OF ASSET OR SETTLEMENT OF LIABILITY
In some jurisdictions, the manner in which an entity recovers or settles the carrying amount
of an asset or liability may affect the following:
(a) The tax rate applicable when the entity recovers or settles the carrying amount of
the asset or liability; and/or
(b) The tax base of the asset or li~bility.
In such cases, an entity measures deferred tax liabilitáes and deferred tax assets using the tax
rate and the tax base that are consistent with the expected manner of recovery or settlement.
Example 13:
An asset has a carrying amount of Rs. 100 and a tax base of Rs. 60. A tax rate of 20% would apply if
the asset was sold and a tax rate of 30% would apply to other income.
(i) The entity recognises a deferred tax liability of Rs. 8 (Rs. 40 at 20%) if it expects to sell the
asset without further use or
(ii) A deferred tax liability of Rs. 12 (Rs. 40 at 30%) if it expects to retain the asëet and recover
its carrying amount through use.
4.OFFSETTING DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES:

An enterprise should offset assets and liabilities representing tax if the enterprise:
(a) Has a legally enforceable right; and
(b) Intends to settle the asset and the liability on a net basis.
Just be careful when making consolidated financial statements because often you just cannot
simply combine deferred tax assets of a parent with deferred tax liabilities of a subsidiary
and present them as 1 net amount.
5.RE-ASSESSMENT OF UNRECOGNISED DEFERRED TAX ASSETS

At the end of each reporting period, an entity reassesses unêecognised deferred tax assets.
The entity recognises a previously unrecognised deferred tax asset to the extent that it has
become probable that future taxable profit will allow the deferred tax asset to be recovered.
14.15
INDAS 12
(7) – DISCLOSURES
1. Components of TAX Expenses
2. Any Current Tax or Deferred Tax directly Charged to Equity (other than P&L)
3. Any Current Tax or Deferred Tax recognised in OCI (other than P&L)
4. A numerical Reconciliation between Tax Expense and the product of accounting profit
multiplied by applicable tax rate.
5. A numerical Reconciliation between average effective tax rate (tax expense divided by
accounting profit) and the applicable tax rate.
Example 14:- (Effective Tax Rate)

An entity has made an accounting profit of Rs. 1,00,000. The tax rate is 30%. In computing the
accounting profit, a penalty of Rs. 10,000 has been considered which is not tax deductible. There
are no other tax impacts. In this case, the taxable profits are Rs. 1,10,000 (Rs. 1,00,000 + Rs.
10,000) and tax expense @ 30% is Rs. 33,000.
The two types of disclosures are as under:
Particulars Amount (Rs )
Accounting profit 1,00,000

Tax at the applicable tax rate of 30% 30,000
Tax effect of expenses that are not deductible in determining
taxable profits: 3,000
Penalties Tax expense 33,000
The two types of disclosures are The effective tax rate is as per the national income-tax rate
Particulars %
Applicable tax rate 30

Tax effect of expenses that are not deductible in determining
taxable profits:- Penalties 3
Average effective tax rate 33
The effective tax rate is as per the=national income-tax rate.
14.16
INDAS 12
(8) - SPECIAL SITUATIONS
CASE 1 - CREATING DEFERRED TAX ON CAPITAL GAIN IN CASE OF
INDEXATION
(a) Whenever an entity recognises an asset, it expects that it will recover the carrying value of
that asset. For example, if an entity recognises an item of land at Rs. 1,00,000, it expects that
it will be able to recover at least Rs. 1,00,000 if that land is sold sometime in future.
(b) The income tax provisions, assuming, provides that if this piece of land is sold after one year,
there will be an indexation benefit @ 10% per year. Thus, if the land is sold after one year, the
cost of the land will for the purpose of taxation will be assumed at ` 1,10,000 (Rs. 1,00,000 +
10%). If it is sold after two years, the cost of the land for the purpose of taxation will be
assumed at Rs. 1,21,000 (Rs. 1,10,000 + 10%).
(c) The tax rate in all years continues to be flat 30%.
(d) Thus, the recovery of the carrying value of land after two years will result into a tax saving of
Rs. 6,300 i.e. 30% of 21000 (121000-100000).
(e) Thus, if after two and half year, land is sold for Rs. 1,50,000, the entity will pay a tax of Rs.
8,700 at 30% of Rs. 29,000 (Rs. 1,50,000 – Rs. 1,21,000). If there would have been no
indexation benefits, the tax liability would have been Rs. 15,000 at 30% of Rs. 50,000 (Rs.
1,50,000 – Rs. 1,00,000). Saving in tax is of Rs. 6,300 (15,000-8,700).
(f) The entity should recognise a deferred tax asset of Rs. 6,300 in this case.
(g) This principle has to be applied to each item of asset.
Note: There are controversial view in case of Indexation of land for a temporary difference
because if the land is not going to be sold in a near future particularly in business then in such case
it is not advisable to calculate temporary difference.
Example 15:
A Ltd purchase a Land on 1 April 1981 (when the cost inflation index was 100) for Rs. 10,000.
Land, being a non-depreciable asset, is not depreciated. Also, the Company does not revalue its
Land. Hence, the Land is maintained by the Company at its cost, ie, Rs. 10,000. However, as per
the income tax law of the country, land is revalued based on the increase in the cost inflation
index. As on 31 March 2016, the cost inflation index is 1081. Suggest measurement of deferred
taxes. Assume tax rate of 20% on sale of land.
SOLUTION:
Carrying value as per the books: Rs. 10,000
Tax base: 10,000*1081/100=Rs. 1,08,100
Deductible Temporary difference =1,08,100-10,000= Rs. 98,100
Tax Rate =20%
Deferred Tax Assets = 98,100*20% = Rs. 19,620
The effect of change in deferred tax assets shall be recognised in the profit or loss.
14.17
INDAS 12
Note: An entity recognises deferred tax assets only when it is probable that taxable profits will be
available against which the deductible temporary difference can be utilised. If an entity does not
have plans to sell-off the land in the near-future, in the opinion of the Author, it will be difficult to
asset that it is probable that sufficient taxable profits will be available in the year in which the
deferred tax assets are reversed. Hence, a deferred tax asset may not be recognised.
CASE 2 - DEFERRED TAXES ON BUSINESS COMBINATIONS

As a result of a business combination, the probability of realising a pre-acquisition deferred tax
asset of the acquirer could change.
An acquirer may consider it probable that it will recover its own deferred tax asset that was not
recognised before the business combination. For example, the acquirer may be able to utilise the
benefit of its unused tax losses against the future taxable profit of the acquiree. Alternatively, as
a result of the business combination it might no longer be probable that future taxable profit will
allow the deferred tax asset to be recovered. In such cases, the acquirer recognises a change in the
deferred tax asset in the period of the business combination, but does not include it as part of the
accounting for the business combination. Therefore, the acquirer does not take it into account in
measuring the goodwill or bargain purchase gain it recognises in the business combination.
Author’s Note:- Such own DTA, if it will be created due to business combination or
reveresed due to buesiness combination shalll not affect the Goodwill/CR recognised due to
Buissness combination instead P&L account shall be used.
CASE 3 – CT & DT ARISING FROM SHARE BASED PAYMENT TRANSACTIONS

v There might be a situation when entity recognize expense on share options granted to the
employees in accordance with IndAS 102, and does not receive tax benefit/deduction of the
same until the share options are exercised.
v In such a situation, DTA may be created for a difference between the TAX BASE of the
employee services expenses (which are disallowed under income tax for future deduction –
treated as ASSET under Tax Base) and the Carrying amount of Nil, as a Deductible Temporary
Difference.
v If the amount permitted as a deduction in future periods under tax laws is dependent upon the
entity's share price at a future date, the measurement of the deductible temporary difference
should be based on the entity's share price at the end of the period.
14.18
INDAS 12
CASE 4 - DISTRIBUTION OF DIVIDENDS
In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net
profit or retained earnings is paid out as a dividend to shareholders of the entity. In some other
jurisdictions, income taxes may be refundable or payable if part or all of the net profit or retained
earnings is paid out as a dividend to shareholders of the entity. In these circumstances, current
and deferred tax assets and liabilities are measured at the tax rate applicable to undistributed
profits.
Example 16:
The following example deals with the measurement of current and deferred tax assets and
liabilities for an entity in a jurisdiction where income taxes are payable at a higher rate on
undistributed profits (50%) with an amount being refundable when profits are distributed. The
tax rate on distributed profits is 35%. At the end of the reporting period, December 31, 20X1,
the entity does not recognise a liability for dividends proposed or declared after the reporting
period. As a result, no dividends are recognised in the year 20X1. Taxable income for 20X1 is Rs.
1,00,000. The net taxable temporary difference for the year 20X1 is Rs. 40,000.
The entity recognises a current tax liability and a current income tax expense of Rs. 50,000. No
asset is recognised for the amount potentially recoverable as a result of future dividends. The
entity also recognises a deferred tax liability and deferred tax expense of Rs. 20,000 (Rs.
40,000 at 50%) representing the income taxes that the entity will pay when it recovers or settles
the carrying amounts of its assets and liabilities based on the tax rate applicable to undistributed
profits.
Subsequently, on March 15, 20X2 the entity recognises dividends of Rs. 10,000 from previous
operating profits as a liability.
On j arch 15, 20X2, the entity recognises the recovery of income taxes of Rs. 1,500 (15% of the
dividends recognised as a liability) as a current tax asset and as a reduction of current income tax
expense for 20X2.
CASE 5 - FINANCIAL LEASES IN THE BOOKS OF LESSOR

As per INDAS 116, under Finance lease lessor derecognise the Asset given on lease and recognise
Lease Receivable Account at Net Investment in Lease (PV of Lease Payments + Residual Value).
However under Income Tax Act, Lessor is charged Rent Received during the year. This results in
creation of Temporary difference.
Temporary Differences will comprise of:
14.19
INDAS 12
Particulars Carrying Amount Tax Base
Temporary difference on Lease Receivable is shown in No such Lease Receivable as

Lease Receivable Books. Interest on Lease per Tax Records. Rent
Receivable is booked as received will be taxable
income which is not Taxable. directly
Temporary difference Org. Asset is Nil since it Tax Base will be available under
on Org. Asset is derecognised. Tax Records & depreciation
benefit will be available
The total cost for both accounting and tax purposes is the same over the period of the lease;
however, it may vary each year.
CASE 6 - TAX HOLIDAY PERIODS

Deferred tax calculation in case of tax holidays under Section 80-IA/80-IB/10A/10B
of Income tax Act
Deferred tax in respect of temporary difference which reverses during the tax holiday period is
not recognised to the extent of the entity's gross total income exempt during the tax holiday in
accordance with s 80-IA/80-IB of the Income-tax Act, 1961.
Example 17:
Y Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second year
of its operation. Depreciation temporary difference resulting in a tax liability in year 1 and 2 is Rs.
200 lakhs and Rs. 400 lakhs respectively. From the third year it is expected that the temporary
difference would reverse each year by Rs. 10 lakhs. Assuming tax rate of 40%, find out the
deferred tax liability at the end of the second year and any charge to the Profit and Loss account.
SOLUTION:
PARTICULARS YEAR 1 YEAR 2

Temporary Difference 200 400
Reversal in Tax Holiday Period 80 0
Reversal after Tax Holiday Period 120 400
DTL charged to P&L 48 160
Total DTL as at the end of Year 2 in BS will be 48 + 160 = 208
14.20
INDAS 12
CASE 7 - RECOGNITION OF DEFERRED TAX ASSETS/LIABILITIES IN CASE
OF INVESTMENTS IN SUBSIDIARIES, BRANCHES, ASSOCIATES AND
INTERESTS IN JOINT VENTURE ARRANGEMENTS:
Temporary differences arise when the carrying amount of investments in subsidiaries, branches,
associates or interest in joint venture arrangements becomes different from tax base (which is
often the cost) of the investment or the interest. Such difference may arise due to:
(a) The existence of undistributed profits of subsidiaries, branches, associates & joint
arrangements;
(b) Changes in foreign exchanges rates when a parent or a subsidiary are based in different
countries; and
(c) A reduction in the carrying amount of an investment in an associate to its recoverable
amount. (eg. Impairment)
For all taxable temporary difference arising from investments in subsidiaries, associates,
investments in joint arrangements and branches, a deferred tax liability shall be recognised
except to the extent that both following condition are satisfied:
(a) The parent, investor, joint operator or joint venture is able to control the timing of reversal
of the temporary difference; and
(b) It is probable that the temporary difference will not reverse (i.e. Permanent difference) in
the foreseeable future. (i.e. intention not to sale the Subsidiary/Associate/JV)
Investments in Subsidiary:
As a parent control the dividend policy of its subsidiary, it is able to control the timing of the
reversal of temporary difference associated with that investment (including the temporary
difference arising not only from undistributed profits but also from any foreign exchanges
translation differences). Furthermore, it would often be impracticable to determine the amount of
income taxes that would be payable when the temporary difference reverse. Therefore, when the
parent has determined that those profits will not be distributed in the foreseeable future the
parent does not recognise a deferred tax liability. The same considerations apply to investments
in branches.
Investments in Associate:
An investor in an associate does not control that entity and is usually not in a position to determine
its dividend policy. Therefore, in the absence of an agreement requiring that the profits of the
associate will not be distributed in the foreseeable future, an investor recognise a deferred
tax liability arising from temporary difference associated with its investment in the associate.
In some cases, an investor may not be able to determine the amount of tax that would be payable if
it recovers the cost of its investment in an associate, but can determine that it will equal or exceed
a minimum amount. In such cases, the deferred tax liability is measured at this amount.
14.21
INDAS 12
Investment in Joint Ventures:
The arrangement between the parties to a joint arrangement usually deals with the distribution of
the profits and identifies whether decisions on such matters require the consent of all the parties
or a group of the parties. When the joint venturer or joint operator can control the timing of the
distribution of its share of the profits of the joint arrangement and it is probable that its share of
the profits will not be distributed in the foreseeable future, a deferred tax liability is not
recognised.
DTA from Investments in Sub, Associates & JV

Similarly, for all deductible temporary difference arising from investments in subsidiaries,
associates, investments in joint arrangements and branches, a deferred tax asset shall be
recognised to the extent that it is probable that.
(a) The temporary difference will reverse in the foreseeable future; and
(b) Taxable profit will be available against which the temporary difference can be utilised.
14.22
INDAS 12
(9) - UNCERTAINITY OVER INCOME TAX TREATEMENT
1. If an entity concludes it is probable that the taxation authority will accept an uncertain tax
treatment, the entity shall determine the taxable profit (tax loss), tax bases, unused tax
losses, unused tax credits or tax rates consistently with the tax treatment used or planned to
be used in its income tax filings.
2. If an entity concludes it is not probable that the taxation authority will accept an uncertain tax
treatment, the entity shall reflect the effect of uncertainty in determining the related
taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates. An entity
shall reflect the effect of uncertainty for each uncertain tax treatment by using either of the
following methods, depending on which method the entity expects to better predict the
resolution of the uncertainty:
(a) The most likely amount— the single most likely amount in a range of possible
outcomes. The most likely amount may better predict the resolution of the uncertainty if
the possible outcomes are binary or are concentrated on one value.
(b) The expected value— the sum of the probability-weighted amounts in a range of
possible outcomes. The expected value may better predict the resolution of the
uncertainty if there is a range of possible outcomes that are neither binary nor
concentrated on one value.
14.23
INDAS 12
MORE EXAMPLES on INDAS 12
Example 18:
Entity A has inventory with carrying amount of Rs. 1,00,000 as at the reporting date. It recovers
the value of inventory through sale in a subsequent reporting period. The sale value is the
economic benefit derived by the entity and is taxable. However, as per the matching and other
concepts, against this sale the entity is entitled to deduct its cost. The cost is the carrying
amount of the inventory i.e., Rs. 1,00,000. The tax base in this case is Rs. 1,00,000.
Example 19:
Entity A has acquired an item of asset for Rs. 1,00,000 for production of certain items to be sold
by the entity. It is deductible equally over two years in the books of accounts. The carrying
amount as the end of first reporting period is Rs. 50,000 (Rs. 1,00,000 – Rs. 50,000). In the
income tax, Rs. 75,000 is deductible in year 1 and balance is deductible in year 2. We have to
compute its tax base as on the last day of the first reporting period. However, in income-tax, it
can claim only Rs. 25,000 being 25% of the cost of the asset as 75% has already been claimed in
year 1. Thus, the tax base in this case is Rs. 25,000.
Example 20:
Interest receivable have a carrying amount of 100. The related interest revenue will be taxed on
a cash basis. The tax base of the interest receivable is nil.
Example 21:
An entity that follows mercantile system of accounting has trade receivables of Rs. 1,000. It
creates a general bad debt allowance of Rs. 50. The carrying amount in the books of accounts of
trade receivables is thus Rs. 950. However, in income-tax, general bad debt provision is not
deductible. In the subsequent period, entity is able to recover only Rs. 950. The amount
recovered is a taxable economic benefit. But for tax purposes, entity is entitled for a deduction
of Rs. 1,000 against this recovery of trade receivable. The tax base is Rs. 1,000.
Example 22:
An entity that follows mercantile system of accounting has trade receivables of Rs. 1,000. It
creates a specific bad debt of Rs. 50. The carrying amount in the books of accounts of trade
receivables is thus Rs. 950. However, in income-tax, specific bad debt provision is deductible in
the very year it is created. In the subsequent period, entity is able to recover only Rs. 950. The
amount recovered is a taxable economic benefit. For tax purposes, entity will be entitled for a
deduction of Rs. 950 against this recovery of trade receivable; Rs. 50 already deducted in the
earlier period. The tax base is Rs. 950.
14.24
INDAS 12
Example 23:
An entity has an investment in listed equity shares. There is no tax on gains that arise on sale of
these listed equity shares. Thus, the tax base in this case will be the carrying amount of the
investments.
Example 24:
Current liabilities include accrued expenses with a carrying amount of Rs. 100. The related
expense will be deducted for tax purposes on a cash basis.
The tax base of the accrued expenses is nil.
Example 25:
Current liabilities include accrued expenses with a carrying amount of Rs. 100. The related
expense has already been deducted for tax purposes.
The tax base of the accrued expenses is Rs. 100.
Example 26:
In the case of revenue which is received in advance, the tax base of the resulting liability is its
carrying amount, less any amount of the revenue that will not be taxable in future periods. For
example Current liabilities include interest revenue received in advance, with a carrying amount
of Rs. 100. The related interest revenue was taxed on a cash basis. The tax base of the interest
received in advance is nil.
Example 27:
Items with a tax base but no carrying amount
There are certain items that have a tax base but no carrying amount. These include items that
are charged to revenue statement in the period in which they are incurred but are allowed as a
deduction over a number of periods as per the taxation laws.
A Limited has been incorporated recently. It incurred Rs. 1,00,000 on its incorporation. It has
been charged to revenue in the very first accounting period. The taxation laws allow deduction
over a period of 5 years. The carrying amount at the end of year 1 is Nil.
The tax base will be Rs. 80,000 (20,000 x 4) as Rs. 20,000 being 1/5th is allowable as a deduction
in taxation laws over 4 years.
Example 28:
An entity acquires an asset on the first day of reporting period for Rs. 120 with a useful life of 6
years and no residual value. It depreciates the asset on SLM basis. The tax rate is 30%. The tax
depreciation is as assumed in the computation below.
The following computations are performed.
14.25
INDAS 12
Financial Statements
Year 1 2 3 4 5 6
Gross Block 120 120 120 120 120 120
Cumulative Depreciation 20 40 60 80 100 120
Carrying Amount 100 80 60 40 20 0
Tax Computation
Year 1 2 3 4 5 6
Tax base brought forward 120 30 20 13 8 3
Depreciation charge (assumed) 90 10 7 5 5 3
Tax base carried forward 30 20 13 8 3 0
Temporary Difference
Year 1 2 3 4 5 6
Carrying Amount 100 80 60 40 20 0
Tax base carried forward 30 20 13 8 3 0
Temporary difference 70 60 47 32 17 0
Cumulative impact +70 –10 –13 –15 –15 –17
+70 – 70
Movement in Balance Sheet

Year 1 2 3 4 5 6
Temporary difference @ 30% 70 60 47 32 17 0
Deferred tax liability 21 18 14 10 5 0
Movement in provision +21 -3 -4 -4 -5 -5
Cumulative +21 -21
Example 29:
The carrying amount of an asset is increased to fair value in a business combination and no
equivalent adjustment is made for tax purposes.
Example 30:
Reductions in the carrying amount of goodwill are not deductible in determining taxable profit
and the cost of the goodwill would not be deductible on disposal of the business.
Example 31:
Unrealised losses resulting from intra group transactions are eliminated by inclusion in the
14.26
INDAS 12
carrying amount of inventory or property, plant and equipment.
Example 32:
Retained earnings of subsidiaries, branches, associates and joint ventures are included in
consolidated retained earnings, but income taxes will be payable if the profits are distributed to
the reporting parent.
Example 33:
Investments in foreign subsidiaries, branches or associates or interests in foreign joint ventures
are affected by changes in foreign exchange rates.
Example 34:
The non-monetary assets and liabilities of an entity are measured in its functional currency but
the taxable profit or tax loss is determined in a different currency.
14.27
INDAS 12
Student Notes:-
14.28
INDAS 12

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CA FINAL

S.No. Topic Name Page No.

1 What is Financial Instrument? 25.3

2 What is Financial Asset? 25.4

3 What is Financial Liability? 25.5

4 What is Equity? 25.6

5 Transactions outside the scope of Fin. 25.9

6 Comparison of FA, FL & Equity 25.10

7 Non-Applicability of IndAS 109/32 25.11

1. WHAT IS FINANCIAL INSTRUMENT?

1. Primary FI : such as receivables, payables, loans

2. Derivatives FI: such as futures, options, forwards, swaps

ITEMS of ASSETS FA – Yes/No

ITEMS of LIABILITIES FL – Yes/No

ITEMS Equity – Yes/No

Equity comprises of:

4.1 Settlement in Own Equity Shares of Entity:

Variable Variable Financial Liability – both parties are

4.2 Puttable Instruments:

Sl. No. Particulars Covered Covered under Applicable

S. No. Financial Assets Financial liabilities Equity

4 A contract that will or A contract that will or A contract that will or

(II) Executory Contracts are outside the scope of IndAS 109:

S.No. Topic Name Page No.

1 Types of Financial Assets 25.13

2 Initial Recognition 25.18

3 Subsequent Measurement 25.19

4 Modification in Financial Instruments 25.27

5 Miscellaneous Provisions under IndAS 109 & 32 25.34

1.1 Financial Assets at “Amortised Cost”

Examples of Financial assets classified & accounted for at Amortised Cost:

Examples of FA classified and accounted for at FVOCI:

1.3 Financial Assets at “Fair Value through Profit & Loss”

2. Financial asset (FA) classified and measured at FVTPL if FA is:

Examples of Financial assets classified and accounted for at FVTPL:

Fair Value through Fair Value through

Business Model SPPI or Held for Residual

1.4 Exception for Some Equity Instruments

Year 2 End: Market Price = 2,580/-

Year 3: Shares Sold @2,600/-

Bank A/c Dr. 5,20,000

OCI A/c (CY) Dr. 4,000

1. FINANCIAL ASSETS – Initial Recognition

2. FINANCIAL LIABILITIES – Initial Recognition

3.1 Subsequent Measurement - Financial Assets

(b) Financial assets measured at Fair Value through OCI (FVTOCI)

(c) Financial assets measured at Fair Value through P&L (FVTPL)

Transaction Cost (P&L) A/c 3

At the end of 1st Year:

Financial Assets (Amortised Cost) - Staff Advances

Year CCF PV &9%

*Either D&A or Directly Transfer to P&L A/c

Particular Amount (Rs.) Particular Amount (Rs.)

FA = P of 3,56,095 @9% for 5 Years = 13,85,085/-

3.2 Subsequent Measurment - Financial Liability

TYPES OF FINANCIAL LIABILITY UNDER AMORTISED COST:

AMORTISED COST - COMPOUND FINANCIAL INSTRUMENTS

Year CCF PV & 11%

*If Holder opts for Cash Equity, cannot deny.

8% Convertible Debentures (FL) A/c

8% Convertible Debenture (FL) A/c Dr. 50,00,000

Case 2: Holder opts for Equity Conversion:

8% Convertible Debenture (FL) A/c Dr. 50,00,000