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Question Paper

FINANCIAL REPORTING Duration: 80

Details: Test 1 [Ch-3, 5, 6 (part I) and 8] Marks: 45

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Q-1 InfraPro India Pvt. Ltd. (InfraPro) is an Indian infrastructure company with two
significant projects: the Eastern Express Rail Link (EERL) and the Southern Solar Power Plant
(SSPP). InfraPro is transitioning to Indian Accounting Standards (Ind AS) and seeks guidance
on the classification and accounting treatment of these projects.

Project Details:

I. Eastern Express Rail Link (EERL):

- EERL is a rail construction project.

- Total estimated project expenses: Rs.500 crore.

- Fair value of construction services: Rs.550 crore.

- Government cash flow guarantee: Rs.700 crore.

- Finance revenue over the operation phase: Rs.25 crore.

- Other income relates to operation phase services.

II. Southern Solar Power Plant (SSPP):

- SSPP is a solar power generation project.

- Total estimated project cost: Rs.300 crore.

- Fair value of project cost: Rs.450 crore.

- SSPP operates on a power purchase agreement (PPA) basis.

(i) How should InfraPro classify the Eastern Express Rail Link (EERL) project under applicable
Ind AS? Provide a brief rationale.

(ii) What is the appropriate classification for the Southern Solar Power Plant (SSPP) project
as per Ind AS? Explain your reasoning.

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(iii) Suggest suitable accounting entries for the preparation of financial statements under
Ind AS for both the Eastern Express Rail Link (EERL) and Southern Solar Power Plant (SSPP)
projects.

(6 marks)

Q-2 On January 1, 20X1, Alpha Manufacturing Ltd. acquired a specialized machine for
Rs.50,00,000. The machine has a useful life of 10 years and no residual value. Alpha
Manufacturing Ltd. uses the straight-line depreciation method for its plant, property, and
equipment.

During the year ended December 31, 20X4, the following events occurred:

1. Routine Maintenance: Alpha Manufacturing Ltd. incurred Rs.1,00,000 on routine

maintenance to ensure the machine's proper functioning.

2. Upgrade and Improvement: On July 1, 20X4, Alpha Manufacturing Ltd. invested

Rs.8,00,000 to upgrade the machine's control system, significantly improving its efficiency
and reliability. Management believes this upgrade extends the machine's useful life by an
additional 5 years.

3. Decommissioning Costs: As of December 31, 20X4, Alpha Manufacturing Ltd. recognized a

liability with a Present value of Rs.5,00,000 for decommissioning costs related to the
machine. These costs are expected to be incurred when the machine reaches the end of its
useful life in 20XX (beyond the initial 10 years).

4. Revaluation: An independent appraiser assessed the fair value of the machine on

December 31, 20X4, to be Rs.57,00,000.

Explain how Alpha Manufacturing Ltd. should account for these events related to the
specialized machine in accordance with Ind AS 16 (Property, Plant, and Equipment).

(6 marks)

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Q-3 ABC Ltd., an Indian company, prepares its financial statements in compliance with Ind
AS. For the financial year ended March 31, 2024, ABC Ltd. entered into the following
significant transactions:

Transaction 1: During the year, ABC Ltd. sold a non-core asset for Rs. 2,00,00,000. The
proceeds from the sale were received in two installments:

- Rs. 1,00,00,000 was received in November 2023.

- The remaining Rs. 1,00,00,000 was received in April 2024.

Transaction 2: In December 2023, ABC Ltd. issued 1,00,000 convertible bonds to raise funds
for a long-term expansion project. The bonds have a face value of Rs. 1,000 each and a
coupon rate of 8%. The bonds are convertible into equity shares at the option of the
bondholders at a conversion ratio of 1:1. The bondholders have the option to convert the
bonds into equity shares at any time during the next five years.

Transaction 3: During the year, ABC Ltd. purchased treasury stock (its own shares) worth Rs.
50,00,000 from the open market. The company intends to hold these shares as treasury
stock for potential use in employee stock option plans (ESOPs).

Transaction 4: ABC Ltd. which already has 80% shares in Subsidiary Company Q, further
acquired 10% of the equity stake in Company Q from open market. - The consideration paid
for this transaction was entirely in cash and amounted to Rs. 8,50,000. - Company Q did not
have any significant cash and cash equivalents at the time of acquisition.

Transaction 5: The company made a significant investment in a joint venture by acquiring

40% equity stake in another entity. The cash outflow for this investment amounted to Rs.
3,50,00,000.

Advise on how each of these transactions should be disclosed and presented in the
statement of cash flows for the financial year ended March 31, 2024, in accordance with Ind
AS 7. Provide a detailed explanation for each transaction.

(6 marks)

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Q-4 (a) XYZ Corporation is a real estate company that owns several commercial properties
across the country. On its balance sheet, it recognizes three separate Cash Generating Units
(CGUs), each comprising multiple properties. One of these CGUs, referred to as CGU-A,
consists of three properties located in a prime business district.

As of March 31, 20X7, the carrying amounts and recoverable amounts of CGU-A and its
individual properties were as follows:

- CGU-A as a whole had a carrying amount of 12 million dollars and a recoverable amount of
11.2 million dollars.

- Property X within CGU-A had a carrying amount of 5 million dollars

- Property Y within CGU-A had a carrying amount of 4 million dollars

- Property Z within CGU-A had a carrying amount of 3 million dollars

The company's management estimated the value in use of CGU-A to be 11.2 million dollars.

Compute the impairment loss, if any, for CGU-A as of March 31, 20X7, and determine the
carrying values of CGU-A and its individual properties after recognizing the impairment loss.
Also, calculate the prospective depreciation for CGU-A and its properties for the year ending
March 31, 20X8, remaining life of each unit is 10 years from March 31, 20X7. Provide
detailed working notes for your calculations.

(5 marks)

(b) ABC Ltd. is a manufacturing company operating in the chemical industry. The company
has a production facility in a specific area where environmental damage has occurred over
the years. As of 31st March 20X2, the company has an obligation to restore the
environmental damage in the area surrounding its factory. Expert advice indicates that the
restoration will be carried out in two distinct phases.

The first phase, involving the removal of contaminated soil from the area, is scheduled to
commence in a few months and will be completed on 31st March 20X3. The estimated cost

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for this phase is Rs.2 million. The second phase, which includes replanting the area with
suitable trees and vegetation, is scheduled to begin three years after the completion of the
first phase and is estimated to cost Rs.3.5 million.

ABC Ltd. uses a cost of capital (before taxation) of 10%. The expenditure, when incurred, will
attract tax relief at the company’s marginal tax rate of 30%. ABC Ltd. has not recognized any
provision for such costs in the past.

Calculate the amount that ABC Ltd. should provide for at 31st March 20X2 for the
restoration costs, taking into account the cost of capital and the tax rate.

(5 marks)

Q-5 ABC Ltd. is an Indian manufacturing company with a diverse workforce. The company
sponsors a defined benefit retirement benefits plan for its employees. The plan's assets and
obligations are managed by an external trustee. The following information pertains to ABC
Ltd. for the financial year ending March 31, 20X2:

Plan Assets:

- As of April 1, 20X1, the fair value of plan assets stood at Rs. 80,00,000.

- On March 31, 20X2, the company made contributions to the plan assets amounting to Rs.
18,00,000.

- The amount paid out from the plan assets on March 31, 20X2, was Rs. 7,00,000.

- The fair value of plan assets on March 31, 20X2, was Rs. 92,00,000.

- The actual return on plan assets for the year was Rs. 12,00,000.

Defined Benefit Obligation:

- As of April 1, 20X1, the present value of the defined benefit obligation was Rs. 90,00,000.

- The current service cost for the year ended March 31, 20X2, was Rs. 14,00,000.

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- Benefit payments totaling Rs. 7,00,000 were made during the year.

- Actuarial gains on the obligation for the year ended March 31, 20X2, amounted to Rs.
5,00,000.

- The discount rate used to calculate the defined benefit liability was 8%.

(a) Calculate the net interest on the net defined benefit liability (asset) for the financial year
ending March 31, 20X2.

(b) Determine the total remeasurement gain or loss for the year ended March 31, 20X2, and
explain how this amount should be reported in the financial statements according to Ind AS.

(c) Prepare a reconciliation statement for plan assets and the defined benefit obligation,
showing the opening and closing balances, and explain where these amounts would be
recognized in the financial statements.

(6 marks)

Q-6 On January 1, 20X1, ABC Limited, a manufacturer of electronic gadgets, acquired a

specialized machine for Rs.12,00,000 to produce its flagship product, the "TechMaster X1."
The machine has an estimated useful life of 5 years and no residual value. ABC Limited uses
a straight-line depreciation policy.

During January 20X1, ABC Limited initiated the production of the TechMaster X1 units. They
incurred various costs throughout the process. Below are the details of the expenses
incurred:

1. Raw Materials and Components: ABC Limited purchased raw materials and components
for Rs.6,00,000. However, they received a cash discount of Rs.30,000 for early payment.

2. Direct Labor: Direct labor costs amounted to Rs.2,50,000.

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3. Machine Operating Costs: The operating costs of the specialized machine used in
production amounted to Rs.1,80,000. This includes repairs and maintenance costs Except
Depreciation.

4. Utilities: other Utilities costs for the production facility during January 20X1 totaled
Rs.20,000.

5. Other Costs: ABC Limited incurred Other production costs such as factory rent
(Rs.1,00,000), factory management salaries (Rs.80,000), and depreciation on other
production equipment (Rs.1,50,000).

6. Quality Control: To ensure product quality, they spent Rs.40,000 on quality control tests.

7. Storage: Inventory storage costs were Rs.10,000 incurred until the inventory is ready for
sale.

8. Sales and Marketing Costs: In preparation for the TechMaster X1 launch, ABC Limited
incurred marketing expenses amounting to Rs.1,60,000.

The production of TechMaster X1 was completed on January 31, 20X1.

Compute the cost of inventory as of January 31, 20X1, taking into account the relevant
expenses and explaining the treatment of each cost component in accordance with Ind AS 2.

(6 marks)

MCQs

1. Surbhi Limited, an Indian company, prepares its financial statements for the year ending
March 31, 20X6. The company has various assets and liabilities that require classification
into current and non-current categories based on their operating cycles and nature.

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Additionally, Surbhi Limited is required to provide further sub-classifications of certain line
items in its balance sheet or notes.

Which of the following statements is true regarding the classification and disclosure
requirements for Surbhi Limited's financial statements for the year ending March 31, 20X6?

A) Surbhi Limited must classify its electricity deposit as a non-current asset because electric
connections are required for as long as the company exists, even though the deposit is
recoverable on demand.

B) Surbhi Limited must classify its tender deposit (Earnest Money Deposit - EMD) as non-
current if it expects to realize the deposit within 12 months, regardless of the bid dates.

C) Surbhi Limited must classify its GST deposit paid under dispute as current if the entity
expects to realize it within 12 months, irrespective of the dispute.

D) Surbhi Limited must classify income received in advance as a non-current liability since it
forms part of the working capital and will be earned within the normal operating cycle.

2. Mr. Sharma, the CFO of Bright Widgets Ltd., an Indian manufacturing company, is
reviewing the interim financial statements for the second quarter of the financial year 2024.
Bright Widgets Ltd. follows Ind AS 34, Interim Financial Reporting. During this review, he
notices that the company has deferred Rs.5,00,000 in administrative expenses from the
second quarter to the fourth quarter on the premise that the fourth quarter will have higher
sales and should be debited with higher expenses. Is this deferral of expenses in line with
Ind AS 34 principles?

A) Yes, it is appropriate to defer expenses based on sales projections.

B) No, expenses should be recognized in the quarter in which they are incurred.

C) Yes, expenses can be deferred if the company expects higher sales.

D) No, expenses should only be deferred if they are incurred unevenly during the financial
year.

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3. A manufacturing company commenced construction of a new factory building on 1st April
20XX. The construction continued over the next 8 months. During October 20XX, the
construction work was temporarily halted for 1 month due to heavy rains and flood in the
area. The company continued capitalizing borrowing costs during this 1 month. The
construction activities resumed from 1st November 20XX and the building was completed
on 30th November 20XX.

In December 20XX, the company's auditor reviewed the capitalization of borrowing costs
during the temporary suspension period and contended that capitalization should have
been suspended for that 1 month.

Which of the following provides the most appropriate guidance under Ind AS 23 on whether
the company should have suspended capitalizing borrowing costs during the 1 month delay
or was correct in continuing the capitalization?

A) The company was correct in continuing capitalization of borrowing costs during the
temporary 1 month suspension as per para 22 of Ind AS 23. The standard requires
suspension of capitalization only during 'extended periods' when development activities are
interrupted. The 1 month delay was not an extended period of interruption and
capitalization can continue during periods of temporary delay which are necessary part of
the process of getting the asset ready for intended use.

B) The auditor was correct that the company should have suspended capitalizing borrowing
costs during the 1 month period. As per para 22 of Ind AS 23, capitalization should be
suspended during periods when development activities are interrupted. Any period of
interruption in development should lead to suspension of capitalization irrespective of the
duration of interruption.

C) The treatment should have been based on materiality of the 1 month interest expense. If
the borrowing costs incurred during the 1 month temporary suspension were material,
capitalization should have been suspended. If the amount was immaterial, continuing
capitalization would be permitted under Ind AS 23.

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D) The company should have suspended capitalizing borrowing costs if management had
expected at the commencement date that such temporary suspensions may occur during
the development. If the suspensions were not foreseen at the commencement date,
continuing capitalization would be permitted even for an extended interruption period.

4. In a non-monetary transaction, XYZ Electronics, an electronics retailer, entered into an

arrangement with Daily Herald, a local newspaper. Instead of making a payment for
advertising services, XYZ Electronics allowed Daily Herald to run an advertisement spot for
their electronics products. Both entities deal in different forms of media, with XYZ
Electronics in the electronics retail business and Daily Herald in the print media business.
The arrangement is not intended for resale.

How should XYZ Electronics and Daily Herald recognize and measure revenue from this non-
monetary transaction?

A) Both entities should not recognize any revenue as this transaction falls under the scope
of paragraph 5(d) of Ind AS 115.

B) Both entities should recognize revenue based on the fair value of the advertising services
provided, as per paragraph 66 of Ind AS 115.

C) Only Daily Herald should recognize revenue based on the fair value of the advertising
services provided, while XYZ Electronics should not recognize any revenue.

D) Only XYZ Electronics should recognize revenue based on the fair value of the advertising
services received, while Daily Herald should not recognize any revenue.

5. MegaPharma Pvt. Ltd., an Indian pharmaceutical company, has a manufacturing

agreement with PharmaContractors Ltd. to produce a specific drug. According to their
agreement, if MegaPharma becomes liable for any product liability claims due to harm
caused by the drug, PharmaContractors will reimburse 40% of the liability. During the

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financial year 20X1-20X2, MegaPharma estimates a potential liability of Rs.1,000,000 for
such claims.

How should MegaPharma Pvt. Ltd. account for the potential liability and the reimbursement
from PharmaContractors Ltd.?

A) Recognize a provision of Rs.1,000,000 for the potential liability and recognize a separate
asset of Rs.400,000 for the expected reimbursement.

B) Recognize a provision of Rs.600,000 for the net potential liability (Rs.1,000,000 -

Rs.400,000 reimbursement).

C) Recognize a provision of Rs.1,000,000 for the potential liability and offset it with the
expected reimbursement of Rs.400,000.

D) Recognize a provision of Rs.600,000 for the potential liability and disclose the expected
reimbursement separately.

(5 x 1 = 5 marks)

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